Nimbler Swiss Mid Caps Outpace Giants as UBS Wealth Says Buy

  • SMI is down vs SMIM up for first annual divergence since 2010
  • Mid caps seen as poised to benefit from domestic recovery

In a year when Swiss giants were hit by a stronger franc and worries about a slowdown in China, traders flocked to mid-sized stocks.

They dumped shares such as Swatch Group AG and Cie. Financiere Richemont SA to buy companies like Galenica AG, a pharmacy-network owner, and chocolate maker Lindt & Spruengli AG. Those get more than half of their sales from Europe and are seeking to expand.

As a result, the Swiss Market Index has lost 3 percent this year, while a gauge tracking companies that are about eight times smaller has climbed 7.4 percent. Its members are less sensitive to fluctuations in the Swiss franc -- up against all its major peers this year -- and a slowdown in the global economy.

“Unless you are exporting your goods outside Europe, you aren’t doing that bad,” said Ion-Marc Valahu, co-founder and fund manager at Clairinvest in Geneva. “Mid caps depend more on the local economy, and the economy in Switzerland isn’t doing so poorly. The internal demand is there.”

The SMIM index is heading for its best quarter since 2009, up 11 percent, and UBS Group AG’s wealth-management unit recommends investors buy the shares next year too, citing strong balance sheets and high earnings growth. Members of the gauge have increased their profits by more than 11 percent in the three years through 2014, beating those in the SMI.

The Swiss government said this month the recovery is set to pick up, with gross domestic product rising 1.5 percent next year and 1.9 percent in 2017, from 0.8 percent in 2015. In the neighboring euro area, the region’s central bank will help the economy grow a projected 1.7 percent in 2016, which would be the most since 2010.

“People are looking for these companies as the European recovery, while still not great, is underway,” said Otto Waser, chief investment officer at R&A Research & Asset Management in Zurich. “Smaller companies are a bit more sheltered from bad news.”

Companies in the SMIM have a 53 percent exposure to Europe, compared with 36 percent for SMI members, according to the investment research firm.

Martin Schlatter, a fund manager at Swiss Rock Asset Management in Zurich, favors bigger stocks. The jump in the mid-cap index took its valuation to 20.5 times estimated earnings, an almost four-year high relative to the SMI.

“Economic growth is still frail, so we prefer at the moment the large caps because of their business diversification and defensive characteristics” Schlatter said. His firm oversees $1.5 billion. “I fail to see a lot of supporting factors for the Swiss mid caps. If volatility stays high, investors will go back into the defensive sectors.”

That hasn’t happened yet. Novartis AG, one of the most defensive stocks and the second-biggest component of the SMI, is down 7.9 percent in 2015, underperforming the broader market for the first time in three years. It’s heading for its biggest annual drop since 2008 after surging more than 23 percent in 2013 and 2014.

“People are expecting the economy to pick up next year,” so they’re turning to stocks that are poised to benefit more from the domestic recovery, said Konstantin Giantiroglou, head of investment advisory and research at Neue Aargauer Bank in Brugg, Switzerland. “It’s a good place to be invested.”

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