* The Swiss National Bank (SNB) announced that it is ending the CHF/€ exchange
rate cap, which it introduced in late-2011. The SNB has also cut interest rates by
50bp. Swiss financial markets have reacted strongly to events with Swiss equities
(SMI) trading c10% lower intra-day. Near-term volatility is likely across all Swiss
assets as investors digest what has been a surprise move by the SNB. This note
considers the investment case for Swiss equities over the coming 12-18 months in a
post-cap environment and also suggests implications for equities elsewhere in
Europe. We think the pull-back in Swiss equities presents an opportunity for
investors to buy the dip and we think that the net impact is positive for the rest of
European equities.
* When they wake up tomorrow morning, and following today's moves, Swiss
investors can choose between negative deposit rates (cash), 10-year bond yields
currently trading below 0.1% or an equity market with a dividend yield of c3%. For
equities to be the wrong asset allocation decision over the next 1-2 years we believe
that investors need to believe in: 1) a prolonged Swiss earnings recession, 2)
widespread Swiss dividend cuts, 3) global recession/deflation, 4) external systemic
shock. None of these scenarios is our base case. While we would expect near-term
moves to remain volatile, we, therefore, see today’s market moves as presenting an
opportunity for investors to re-load, buy the dip or add to existing positions.
* A stronger CHF is going to present an immediate hit to Swiss corporate earnings, as
suggested by our Banks, Capital Goods and Luxury Goods teams, amongst others,
but we believe that share prices have quickly priced in a significant portion of this.
We therefore see today's fall as an opportunity for fresh capital to raise exposure.
Given the lack of yield/return opportunities in other asset classes, there is no need
for investors to take on equity benchmark risk. This makes the ongoing case for
secure income/high cash generating stock opportunities in the Swiss market.
* For non-CHF based investors, today’s sharp fall in the SMI has been more than
covered by respective currency moves, e.g. US$ investors have made a good
return today on the SMI, providing they were not hedged. How will the investment
case for the Swiss equity market look tomorrow morning for them? We show that the
SMI bears an uncanny likeness to the US equity market in terms of high price/book
and equally high/impressive RoE. Before currency-induced EPS downgrades, Swiss
equities also traded on the same 2016E P/E (14.5-15x) and had the same 2014-
16E EPS growth profile as US equities, but with a >50% higher DY. We can also
now add strong currency to that list of similarities. So, while near-term EPS
downgrades present headwinds, if much of that has been priced in today’s moves
then we see Swiss equities as offering similar attractions to US equities from here.
* Additionally, and more importantly, we don't think that today's moves detract from
our overall barbell strategy across European equities. This barbell is exposed to
stocks/sectors which offer a combination of attractive fundamentals with liquidity
support through two main groups: 1) surplus FCF with strong balance sheets, where
the potential for corporate re-leveraging (bottom up QE), especially with ECB QE in
place, offers upside optionality to investors; 2) "reasonable and secure" yield stocks/
sectors which can see direct and indirect beneficiaries of ECB QE (top down QE) –
this includes sectors with high DY and surplus FCF such as Insurance and
Telecoms, as well as likely beneficiaries of further €/US$ weakness such as stocks
with operating leverage or surplus FCF/strong balance sheets and high US
exposure. Overall, we would prefer to own these two themes than Swiss equities
since we want exposure to the liquidity “kicker” which we see from either corporate
re-leveraging (bottom-up) or from QE (top-down).