By Sara Sjolin, MarketWatch
Don’t call it home-country bias. As the big investment banks start to look ahead to 2018, UBS has already picked one of its favorites: Switzerland.
The Swiss banking giant cites relatively cheap valuations, the secureness of the market and a big potential for returns amid improving economic conditions for quarterly results in picking its home country.
“On a yield basis, Switzerland looks the most interesting. It’s the second-cheapest country in Europe right now, its dividend yield relative to Europe is near a 30-year high and its dividend yield relative to the world is near a 30-year high,” said Karen Olney, equity strategist at UBS in London.
“Profits are going up and I think the market has been left behind, and, in general, underperformed recently. So, it looks interesting,” she said.
Indeed, Swiss markets lag behind the broader European market, with the iShares MSCI Switzerland ETF /zigman2/quotes/204479296/composite EWL +0.23% down 0.1% over the last three months, compared with a 3% gain for the iShares MSCI Eurozone ETF /zigman2/quotes/208576341/composite EZU +0.20% for the same period. Olney thinks that the Swiss region is more likely to outperform its European counterparts given that relative underperformance.
On UBS’s “country scorecard” Switzerland ranks first among prospective places to invest, zooming ahead of the U.K., Germany and Italy in second, third and fourth place, respectively.
Here are some of the reasons the non-EU country lands in the top spot, according to the Swiss bank:
1. The dividend yield is a major selling point. The yield for Swiss stocks relative to the 10-year average stands at 15%, making it the highest among the biggest European economies. That means Swiss stocks are a comparative bargain, with valuations among the lowest across the continent.
2. It’s safe. UBS points out that about 50% of the yield comes from food and pharma companies, which belong to the more defensives sectors.
3. Earnings are catching up. Overall, UBS sees European earnings growth at 10% next year, but the return on equity is still depressed compared with other periods of expansion. However, ROE is about to join the party, according to UBS, and the Swiss market is particularly well positioned to benefit from that trend.
In terms of potential for profit recovery, the bank ranks Switzerland number four in Europe and has added Swatch Group AG /zigman2/quotes/203516858/delayed CH:UHR +0.95% and Roche Holding AG /zigman2/quotes/206324342/delayed CH:ROG +0.74% to its list of stocks to benefit the most from ROE upside.
4. The currency is weakening. UBS expects the Swiss franc to weaken against the euro /zigman2/quotes/210561153/realtime/sampled EURCHF +0.0574% next year, with the shared currency forecast to buy 1.22 francs, compared with 1.16 in recent trade Monday. That’s likely to help boost earnings as about 34% of sales in Switzerland go to the eurozone.
”During the crisis, Switzerland had a very strong currency, a heaven currency, but profits were disastrous,” Olney said. Referenced earlier, so-called home-country bias refers to a tendency for investors to focus the vast majority of their investments domestically.