Switzerland in the spotlight - J. Safra Sarasin...2018/08/31 · For 2017 growth was revised to...

Cross-Asset Weekly 31 August 2018

1 | Cross-Asset Weekly

Switzerland in the spotlight

Swiss economic data to be published next week are likely to highlight the strong economic dynamic Switzerland currently enjoys. Economic growth for Q2 due to be published on Thursday will reflect increasing employment growth, special effects from the World Cup and also significant upward revisions to 2017 GDP. As a result, we expect Swiss GDP growth to surpass the euro area for the first time since 2014. However, capacity utilization and employment are already very high and immigration from EU-countries is slowing down which highlights that the economy is unlikely to grow above its potential for much longer. We expect low unemployment data, an increasing inflation rate and a stable PMI to reinforce this message this week. In this environment, we see further upside potential for the Swiss franc that, at current levels, should not be mitigated by SNB interventions. We also consider the CHF as an attractive overlay for risky assets in a multi asset portfolio. An additional factorfavouring the CHF might be the upcoming budget proposals in Italy that probably will clash with the budget rules in the EU, and create a news flow that could lead to higher Italian bond yields and upward pressure on safe haven Swiss francs. The Swiss equity market only partly benefits from the strong economic position of the domestic economy since Swiss companies achieve the bulk of their sales abroad. We consider large caps as being close to fair value, and anticipate mid-caps to resume their outperformance into year-end. This week’s highlights

Swiss Macro 2Swiss economy catches up with the euro area

Swiss equities 4Mid-caps are likely to sustain their outperformance

Foreign Exchange 6Long Swiss franc vs Euro is an attractive portfolio hedge

Economic Calendar 8Week of 03/09 – 07/09/2018

Market Performance 9Global Markets in Local Currencies

Contacts Dr. Karsten Junius, CFA Chief Economist [email protected] +41 58 317 32 79 Raphael Olszyna-Marzys International Economist [email protected] +41 58 317 32 69 Cédric Spahr, CFA Equity Strategist [email protected] +41 58 317 31 28 Josh Bouchard Foreign Exchange Strategist [email protected] +41 58 317 32 01 Dr. Florian Weber, CFA Fixed Income Strategist [email protected] +41 58 317 31 14 David Rees Emerging Market Strategist [email protected] +41 58 317 51 36 Kunal Singh, CFA Emerging Market Credit Analyst [email protected] +41 58 317 31 21 Thilina Hewage, CFA Emerging Market Credit Analyst [email protected] +65 6230 66 61 Walid Bellaha Emerging Market Credit Analyst [email protected] +41 58 317 51 57



Swiss Macro

Swiss economy catches up with the euro area

Despite this week’s decline of the KOF-barometer, the Swiss economy remains strong and is likely to grow faster than the euro area for the first time since 2014. Upward revisions to annual growth data for 2017 together with domestic spending and special effects from the World Cup will result in strong quarterly growth.

For the first time since 2014, we expect the Swiss economy to grow even more strongly compared to a year ago than the euro area when quarterly data are published next Thursday. In 2Q18, employment growth increased by 2.0% yoy in full-time equivalents. With the notable exception of the financial sector, employment grew on a broad base both in the producing (1.4%) and service sector (2.2%). Meantime, future employment intentions remain high, particularly in the IT and communication and related services sector. However, companies also find it increasingly difficult to hire qualified employ-ees as mentioned by 41% in the producing and 29.9% in the service sector such that unfilled vacancies rose in July to the highest level since 2011 (Exhibit 1). At the same time, it seems to become more difficult to attract foreign workers. While the number of immigrants (permanent and temporary) remained roughly the same in the first 7 months than in the same period last year, it declined by around 10% compared to 2015. This decline is almost exclusively caused by lower immigration from EU/EFTA countries, reflecting the recovery in the euro area economy. Otherwise, economic indicators were mixed this week. We were particularly disappoint-ed about the lower KOF-Barometer for August that did not follow the rebound of the German ifo- and Sentix-indices. This might reflect a stronger Swiss franc which appreci-ated by 5% since the beginning of the year. We are now curious whether the purchasing managers’ index for August will show stronger readings on Monday. At the current level the KOF-barometer remains slightly above its long run average. Positive signals came from domestic consumption. Negative signals originated from industrial production and the construction sector. Better news were reported by the Swiss mechanical and elec-trical engineering industries, which reported very strong new orders and sales growth rates of 24.1% and 16.4% yoy while also pointing out that the shortage of skilled la-bour is becoming a more binding constraint particularly. As capacity utilization has ad-ditionally reached a level that is well above its long term average, it seems likely that overall growth rates might fall in the coming year while wage growth might add to do-mestic pressure on core inflation.

Dr. Karsten Junius, CFA Chief Economist [email protected] +41 58 317 32 79

Strong employment growth despite stag-nant immigration

Strong orders in the machinery and electri-cal engineering sector but more moderate signals otherwise

Exhibit 1: High unfilled vacancies and hiring intentions Exhibit 2: KOF barometer did not follow stronger German ifo-index

Source: Datastream, J. Safra Sarasin, 29.08.2018 Source: Datastream, J. Safra Sarasin, 29.08.2018

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5000

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1Q 2000 1Q 2003 1Q 2006 1Q 2009 1Q 2012 1Q 2015 1Q 2018

Unfilled job vacancies

KOF employment indicator (RHS)



In line with the labour market, strong income growth and stable growth in the most im-portant export markets, we do expect positive news from the publication of the Q2 GDP data and a growth rate of 0.6% qoq and 2.5% yoy. As in the first quarter, corrected for sport events GDP growth would likely be lower by around 0.1 – 0.2 percentage points as the revenues from merchandizing and organizing of the World Cup are booked in Switzerland where the FIFA is residing. An additional carry over effect from revisions to previous quarters might boost the yoy-growth rate: This week the Swiss statistical of-fice published revised annual GDP data for 2015 to 2017 which are higher by 0.1%, 0.2% and 0.6% respectively. The State Secretariat for Economic Affairs (SECO) that is publishing the quarterly data will adjust previous quarters to match the annual data – all of which will result in a stronger growth profile than the one we show in Exhibit 4. For 2017 growth was revised to 1.6%, driven by investment spending (3.3%) while pri-vate consumption (1.1%) grew less than 2016 as population growth declined. For the third quarter we expect solid but more moderate growth rates than the 0.6% that were achieved on average in the past 4 quarters. The appreciation of the Swiss franc is likely to slow export growth while the lower consumer confidence could weigh on private consumption even though in the past the correlation has not always been very tight. In the past two quarters, consumers particularly became more concerned about higher prices and a lower ability to save. Over the coming quarters, GDP is still likely to growth around its long term potential of around 0.4%. Higher growth rates would require stronger investment spending to expand capacities to produce and also higher immigration to expand the labour supply.

Exhibit 3: New Orders point to stronger industrial production Exhibit 4: Swiss economy to outperform the euro area again


Significant revisions to 2015 – 2017 GDP levels

Growth to moderate in the second half

Exhibit 5: Consumer less upbeat about economy Exhibit 6: Investment needed as capacity utilization is very high


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2006 2008 2010 2012 2014 2016 2018

Foreign orders in % yoy

Domestic orders in % yoy

Industrial production in % yoy (RHS) -6.0

-4.0

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1999 2002 2005 2008 2011 2014 2017

Swiss GDP in % yoy

Euro area GDP in % yoy

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80-50

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2010 2013 2016

Consumer confidenceExpected economic situationPrice expectations (inv., RHS)

75

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2

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8

2003 2006 2009 2012 2015 2018

Fixed capital formation in %yoyIndustry capacity utilization (in%, RHS)



Swiss equities

Mid-caps are likely to sustain their outperformance

Swiss equity performance failed to impress in 2018, with the notable exception of mid-caps. Only a few sectors like information technology had positive returns. The strong growth of the Swiss economy plays only a modest role for Swiss compa-nies, which achieve the bulk of their sales abroad. We consider large caps as be-ing close to fair value and anticipate mid-caps to resume their outperformance into year-end.

Swiss equities had a mixed year so far in 2018, not unlike neighbouring markets such as the UK and the euro area. The large caps index SMI is slightly under water since the start of the year (-0.4% including dividends), while the mid-caps index SMIM delivered solid gains with a total return of 6.25%. With global and Swiss growth retaining good momentum, yet having passed their peak in acceleration, 2018 is likely to turn out as a transition year for Swiss equities. We expect Swiss mid-caps to keep outperforming large caps into year end, as they enjoy the tailwind of elevated growth, which is not the case for a majority of the large caps. Some sectors such as utilities, information tech-nology and healthcare equipment & services had a stellar year, while others clearly lagged and in the case of consumer services, banks and telecoms have accumulated net losses. Recent Swiss GDP and leading indicators confirm the robustness of the Swiss econo-my. Swiss equity investors need to be aware though that Swiss companies, both large and medium sized, are actually more sensitive to the global business cycle than to their national economy. Swiss companies generate about 36% of total sales in Europe, 28% in North America and 32% in emerging markets. For a large number of them, Swit-zerland represents only a small fraction of their revenues. A glance at Exhibit 1 reveals that the purchasing managers’ index for the manufacturing sector has passed its peak, yet hovers at historically elevated levels. Since the SMI tends to oscillate in sympathy with the PMI, one needs to be a little careful before com-ing to the premature conclusion that good growth itself warrants rising stock prices. Our valuation indicators lead us to the conclusion that the SMI index is probably fairly valued around 9’000 points. Analysts’ net earnings revisions have fallen sharply, while the overall early rate of earnings growth has stopped accelerating (see Exhibit 2).

Cédric Spahr, CFA Equity Strategist [email protected] +41 58 317 31 28

Swiss equities had a mixed year so far, with only mid-caps delivering good returns.

Swiss companies sell mainly abroad

The Swiss economy is performing well, yet earnings growth has peaked

Exhibit 1: The Swiss PMI indicates continued economic expan-sion, yet this is largely reflected in the valuation of Swiss equities.

Exhibit 2: PMI, earnings revisions and growth have passed theirzenith for Swiss equities, capping upside potential.


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2000 2004 2008 2012 2016

SMI Manufacturing PMI index (rhs)

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2000 2005 2010 2015

Swiss PMI

Net earnings revisions in % (rhs)

12M fwd EPS yoy (rhs)



The earnings of Swiss companies (SMI index) are growing at a slightly faster rate than in the euro area, yet lie below Japan and the USA. Long-term valuation appears close to fair value with a price to earnings ratio of 16.2 for the SMI based on forward-looking earnings. The earnings yield gap ‒ the difference between the earnings yield (earn-ings/price) and the 10 year Swiss bond yield ‒ remains very attractive at 6% (see Ex-hibit 4). As long as the SNB maintains its negative interest rate policy, Swiss equity valuation is unlikely to be challenged by long-term CHF bond yields. Swiss mid-caps kept outperforming large caps in 2018. In spite of a bounce back of the large caps in July-August ‒ when defensive large names re-rated as a result of emerging market and trade war risks ‒ we expect positive seasonality and robust global growth to deliver an extra boost to mid-caps in relative terms into year-end (see Exhibit 5). Many mid-caps enjoy strong earnings growth thanks to their exposure to overseas markets. We thus expect the SMIM index to outperform the SMI index in the coming months. We also expect the sectors that have performed best this year to keep appre-ciating, and similarly underperforming sectors to remain weak in relative terms (see Exhibit 6).

Exhibit 3: SMI earnings growth lies ahead of the euro area, yetlags other major markets.

Exhibit 4: The SMI index trades on a P/E of 16.2, which is aboutfair, while the earnings yield gap over bonds remains attractive.


Swiss equity valuation is close to fair

Swiss mid-caps likely to outperform large caps into year end

Exhibit 5: Swiss mid-caps are likely to reassert their outperfor-mance over large caps thank to superior earnings growth

Exhibit 6: Selectivity was key so far in 2018, with few sectors likeutilities and technology delivering the bulk of returns.

Source: Bloomberg, J. Safra Sarasin, 30.08.2018 Source: Bloomberg, J. Safra Sarasin, 30.08.2018

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2012 2014 2016 2018

S&P 500 DJ Euro StoxxNikkei 225 MSCI EMSMI

12M fwd EPS yoy in %

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3

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2000 2004 2008 2012 2016

MSCI Switzerland earnings yield gap in %(EPS/P - 10yr yield)12M forward P/E (rhs)

90

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2010 2012 2014 2016 2018

SMIM / SMI ratio

SPI Extra / SMI ratio

-20%

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30%Total return in % in 2018



Foreign Exchange

Long Swiss franc vs Euro is an attractive portfolio hedge

The Swiss franc has rallied over the past few months along with rising fears relat-ed to the Italian political situation. This has coincided with a strengthening of the local economy and rising inflation rates. A stronger Swiss economy in an environ-ment of elevated global uncertainty makes long CHF vs. Euro an attractive overlay to a risky portfolio. While the SNB will lean against rapid appreciation, we believe the rally has room to run.

The CHF has rallied over the past couple of months along with concerns related to the political situation in Italy (Exhibit 1). This followed a long period of depreciation follow-ing the breaking of the peg as the SNB pursued an easy policy and intervened to pre-vent further appreciation of the Franc. Despite the recent rally, the currency remains 6% below the level of the most recent interventions, even before accounting for the evolv-ing economic picture (Exhibit 2). Additionally, we would expect the SNB to be somewhat cautious with further interventions given their already large balance sheet.

Over the past couple years, the economy has also improved dramatically as the impact of easy monetary policy and a cheaper currency has supported local activity and brought about an end to deflationary conditions (Exhibits 3 and 4). While we believe the SNB will be cautious and wait for the ECB to change policy, strengthening economic conditions give some leeway to allow additional currency appreciation.

Josh Bouchard, CFA Forex Exchange Strategist [email protected] +41 58 317 32 01

Swiss Franc has rallied recently though remains below levels of prior interventions

Exhibit 1: CHF has rallied along with concerns over Italy Exhibit 2: The Franc remains below levels of prior intervention


Swiss economy now on more solid footing

Exhibit 3: Swiss economy has been strong relative to euro area Exhibit 4: Inflation rates have converged with European rates


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3.5%1.09

1.11

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1.23Jan-18 Mar-18 May-18 Jul-18 Sep-18

EUR/CHF (inverted) Italian Spreads (rh scale)

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EUR/CHF SNB Sight Dep (ann chg, rh scale)

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2000 2003 2006 2009 2012 2015 2018

CHEvsEUR PMI

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1995 2003 2012 2021

CHE Core Inflation EUR Core Inflation



While the CHF remains slightly overvalued by traditional PPP measures, a combination of specialization and productivity helped the economy weather the shock of the revalua-tion. This is also reflected in the strength of the external accounts as the current ac-count and the trade balance remain significantly in surplus (Exhibit 5). The competi-tiveness of the economy, ranked #1 by WEF, can also be seen in its export market share where Switzerland has gained despite its currency strength (Exhibit 6).

Risks in the global economy are increasing, both due to late cycle dynamics and idio-syncratic factors such as the intensifying trade war and ongoing political risk in Italy. With economic conditions alone supporting a moderately stronger Swiss franc, a short EUR/CHF position provides insurance against these risks and is both cheap (Exhibit 7) and more importantly, negatively correlated to global equities which drive much of the return in many investor portfolios (Exhibit 8).

Evidence suggests that the CHF is not as overvalued as indicated by traditional measures

Exhibit 5: Current account and trade surpluses remain large Exhibit 6: Swiss exporters continue to gain market share


Long CHF against the Euro is a cheap and diversifying hedge to risky portfolios

Exhibit 7: Hedging EUR/CHF exposure is cheap Exhibit 8: EUR/CHF cross is negatively correlated to equities


0%

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6%

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1980 1985 1990 1995 2000 2005 2010 2015 2020

Swiss Current Account in % of Potential GDP Trade Balance

1.4%

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1.6%

1.7%

1.8%

1.9%

2.0%

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2.3%

2001 2004 2007 2010 2013 2016 2019

Swiss Exports as % of Partner Country Imports

-2.5%

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2010 2011 2012 2014 2015 2017 2018

EUR/CHF Forward Discount

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1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

EUR/CHF Rolling Correl to MSCI World (inverted)



Economic Calendar

Week of 03/09 – 07/09/2018

Country Time Item Date Unit Consensus

Forecast Prev.

Monday, 03.09.2018 CH 09:30 PMI Manufacturing Aug index - 61.90UK 10:30 PMI Manufacturing Aug index - 54.0

Tuesday, 04.09.2018 CH 09:15 CPI Aug mom - -0.2%EMU 11:00 PPI Jul mom - +0.4%US 15:45 PMI Manufacturing, final Aug index - 54.5 16:00 ISM Manufacturing Aug index 57.4 58.1

Wednesday, 05.09.2018 CN 03:45 PMI Services Aug index 52.5 52.8EMU 10:00 PMI Services, final Aug index - 54.4UK 10:30 PMI Services Aug index - 53.5

Thursday, 06.09.2018 CH 07:45 GDP 2Q18 yoy - +2.2%DE 08:00 Factory Orders Jul mom - -4.0% 08:00 Factory Orders Jul yoy - -0.8%US 14:30 Continuing Claims Aug 25 1 000 - - 15:45 PMI Services Aug index - 55.2 16:00 ISM Non-Manufacturing Index Aug index 56.8 55.7 16:00 Factory Orders Jul mom -0.5% +0.7% 16:00 - Less Transportation Jul mom - +0.4% 16:00 Durable Goods Orders, final Jul mom - -1.7% 16:00 - Less Transportation, final Jul mom - +0.2% 16:00 Capital Goods Orders, final Jul mom - +1.4%

Friday, 07.09.2018 CH 07:45 Unemployment Rate,sa Aug % - 2.6%DE 08:00 Industrial Production Jul mom - -0.9% 08:00 Industrial Production Jul yoy - +2.5%US 14:30 Change in Nonfarm Payrolls Aug 1 000 192 157 14:30 Change in Manufact. Payrolls Aug 1 000 30 37 14:30 Unemployment Rate Aug % 3.8% 3.9% 14:30 Avg. Hourly Earnings Aug mom +0.3% +0.3%

Source: Bloomberg, J. Safra Sarasin



Market Performance

Global Markets in Local Currencies

Government Bonds Current value Δ 1W Δ YTD TR YTD in %

Swiss Eidgenosse 10 year (%) -0.10 1 5 -0.4

German Bund 10 year (%) 0.34 0 -9 1.7

UK Gilt 10 year (%) 1.44 16 25 -1.5

US Treasury 10 year (%) 2.85 4 44 -0.3

French OAT - Bund, spread (bp) 35 0 -1

Italian BTP - Bund, spread (bp) 285 5 127

Spread over govt bonds

Change in credit spread Credit in-

dex

Credit Markets (bp) Δ 1W Δ YTD TR YTD in %

US Investment grade corp. bonds 60 -1 -11 -2.0

EU Investment grade corp. bonds 68 -3 -24 -0.6

US High yield bonds 333 -4 -27 -1.8

EU High yield bonds 297 -12 -64 -0.1

Stock Markets Level P/E ratio 1W TR in % TR YTD in %

SMI - Switzerland 8,992 15.9 -0.1 -0.4

DAX - Germany 12,424 13.1 1.0 -3.3

MSCI Italy 689 11.2 -0.6 -6.8

IBEX - Spain 9,443 12.3 -1.0 -3.1

DJ Euro Stoxx 50 - Eurozone 3,418 13.8 0.3 0.8

MSCI UK 2,170 13.4 -0.6 -2.6

S&P 500 - USA 2,901 18.0 1.6 9.9

Nasdaq 100 - USA 7,643 21.9 3.1 20.3

Nikkei 225 - Japan 22,865 16.2 2.1 1.5

MSCI Emerging Markets 1,058 12.2 1.0 -6.8

Forex - Crossrates Level 3M implied volatility

1W in % YTD in %

USD-CHF 0.97 6.7 -1.8 -0.9

EUR-CHF 1.13 5.8 -1.3 -3.6

GBP-CHF 1.26 7.6 -0.7 -4.7

EUR-USD 1.17 7.3 0.5 -2.7

GBP-USD 1.30 8.5 1.2 -3.8

USD-JPY 110.8 7.3 -0.4 -1.7

EUR-GBP 0.90 7.1 -0.7 1.2

EUR-SEK 10.64 7.5 0.2 8.2

EUR-NOK 9.73 6.6 0.5 -1.1

Commodities Level 3M realised

volatility 1W in % YTD in %

CRB Commodity Index 411 4.7 -0.3 -4.9

Brent crude oil - USD / barrel 77 20.4 2.9 15.5

Gold bullion - USD / Troy ounce 1,206 11.3 0.1 -7.4

Source: J. Safra Sarasin, Bloomberg


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Qatar Financial Centre (QFC): This material is intended to be distributed by Bank J. Safra Sarasin (QFC) LLC, Qatar [“BJSSQ”] from QFC to Business Customers as defined by the Qatar Financial Centre Regulatory Authority (QFCRA) Rules. Bank J. Safra Sarasin (QFC) LLC is au-thorised by QFCRA. This material may also include collective investment scheme/s (Fund/s) that are not registered in the QFC or regulated by the Regulatory Authority. Any issuing document / prospectus for the Fund, and any related documents, have not been reviewed or approved by the Regula-tory Authority. Investors in the Fund may not have the same access to information about the Fund that they would have to information of a fund registered in the QFC; and recourse against the Fund, and those involved with it, may be limited or difficult and may have to be pur-sued in a jurisdiction outside the QFC. Singapore: This document is disseminated by Bank J. Safra Sarasin Ltd., Singapore Branch in Singapore. Bank J. Safra Sarasin, Singapore Branch is an exempt financial adviser under the Singapore Financial Advisers Act (Cap. 110), a wholesale bank licensed under the Singa-pore Banking Act (Cap. 19) and regulated by the Monetary Authority of Singapore. © Copyright Bank J. Safra Sarasin Ltd. All rights reserved. Bank J. Safra Sarasin Ltd J. Safra Sarasin Research General Guisan-Quai 26 P.O. Box CH-8022 Zürich Switzerland T: +41 (0)58 317 33 33 F: +41 (0)58 317 33 00

Switzerland in the spotlight - J. Safra Sarasin...2018/08/31 · For 2017 growth was revised to...

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Transcript of Switzerland in the spotlight - J. Safra Sarasin...2018/08/31 · For 2017 growth was revised to...