SMI may hit one ATH after another till the end of the year.
It appears that the failure of Swiss government-backed Swiss bank UBS last year, which was subsequently absorbed by Credit Suisse, prompted the government to regulate more restrictively for banks that are considered key and too big to fail destabilizing the Swiss economy, in April. Hence, the Swiss National Bank and the governing federal council acted on capital requirements, liquidity, early intervention, and recovery and resolution planning. UBS as a combined bank is currently stronger than Credit Suisse before the crisis, but there are still weaknesses that need to be addressed according to the central bank's communiqués. It appears that the liquidity coverage ratio is proving to be a key measure of the bank's ability to meet its payout and cash demands after the panic and outflows of retail deposits were greater and faster than assumed. In other words, panic has been severe throughout the past year and it has been difficult to calm savers. The antitrust watchdog on the one hand is of the opinion that more scrutiny should be exercised on the group, while the Swiss financial regulator is of the opposite opinion.
On the other hand, international investors have mostly invested in Swiss cash equities trying to obtain discounted prices resulting from the Swiss banking panic and also hoping that a market like Switzerland, very focused on exports especially to Europe, would outperform its peers, largely as a result of central bank policy changes that may push the Swiss franc further away from the highs reached in 2023. Although there is a perceived global slowdown, and the third quarter of the year is not going to be easy for exporters as the franc does not facilitate business by being too high, the central bank's guideline is that this could change soon, trying to tune in to Fed and ECB policies. Morningstar Direct reported that Swiss-domiciled funds recorded their highest net inflows since 2022.
The Swiss SMI index caught up with the European STOXX 600 rising 2% so far this year after last year's 3.8% rise, well behind the 12.7% increase of the European one. To a large extent, one could consider that the "Franc" was partly to blame for this, as many Swiss firms as we say are exporters and report their profits and pay part of their costs in francs, which means that the cost of currency conversion means that these profits are reduced. The independent firm Kepler Cheuvreux, reported that around 25% of SMI performance is foreign exchange movements, and this has become more acute in 2023 with the franc so expensive against the euro and the dollar, being the highest level since 2015. To name a few, pharma Roche or watch firm Swatch, remarked that the currency was proving a drag on their earnings in the last quarter of 2023. It is foreseeable to believe that this will gradually ease over the course of the year.
It is clear that companies reporting in Swiss francs are facing a huge hurdle and this creates competitiveness issues for them against their Japanese rivals, as the yen was the worst performing currency in 2023 falling 15% against the franc. Although the pharma and food sectors are relatively countercyclical and are well represented in the Swiss index, both sectors will benefit from a weak franc to sell to Europe.
Many strategists may have thought that "the Swiss franc is short" by 2024, coupled with the slowdown in global growth may favor defensive sectors. It would not be surprising to see European equities outperform by this currency offset by the end of 2024, given that they are currently undervalued, versus Europeans who may be overweight.
So far this year the franc has corrected its price levels and this could be a bullish sign for the SNB. Note that the Swiss franc is largely driven by two factors: global tensions are forcing investors to seek a safe haven currency and the SNB and its policies are the second factor. According to the SNB, the current level of inflation seems to be to its liking, so this could facilitate currency issuance. This bank is so interventionist that exemplifying, in 2022-23 they engaged in currency buying to reduce pressure on imported goods pushing their currency higher. Now with inflation under control, they are again turning their eye to franc appreciation. It is quite possible that the SNB has sold francs to bring this weakening forward, and this is visible after they showed data this month with a big jump in their January foreign currency reserves.
If we look at the 1 hour chart of the SMI, since May 1st the index has been climbing until it hit a brake at the end of the month, again in June it started another upward push until it reached the highs on June 7th and we are currently in a moment of correction. This only seems to be a stop to gather strength. At this moment the price bell is formed by a double bell with the lower part in the area near the lows and the upper part of the bell with the highest current volume in the price zone of 12,000 points. It is foreseeable that the index will seek to break out of the bearish corrective channel to support a new rampant price rise, as it is now one of the key indexes in the Eurozone.
Ion Jauregui - ActivTrades Analyst
*******************************************************************************************
The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and such should be considered a marketing communication.
All information has been prepared by ActivTrades ("AT"). The information does not contain a record of AT's prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.
Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acing on the information provided does so at their own risk.
On the other hand, international investors have mostly invested in Swiss cash equities trying to obtain discounted prices resulting from the Swiss banking panic and also hoping that a market like Switzerland, very focused on exports especially to Europe, would outperform its peers, largely as a result of central bank policy changes that may push the Swiss franc further away from the highs reached in 2023. Although there is a perceived global slowdown, and the third quarter of the year is not going to be easy for exporters as the franc does not facilitate business by being too high, the central bank's guideline is that this could change soon, trying to tune in to Fed and ECB policies. Morningstar Direct reported that Swiss-domiciled funds recorded their highest net inflows since 2022.
The Swiss SMI index caught up with the European STOXX 600 rising 2% so far this year after last year's 3.8% rise, well behind the 12.7% increase of the European one. To a large extent, one could consider that the "Franc" was partly to blame for this, as many Swiss firms as we say are exporters and report their profits and pay part of their costs in francs, which means that the cost of currency conversion means that these profits are reduced. The independent firm Kepler Cheuvreux, reported that around 25% of SMI performance is foreign exchange movements, and this has become more acute in 2023 with the franc so expensive against the euro and the dollar, being the highest level since 2015. To name a few, pharma Roche or watch firm Swatch, remarked that the currency was proving a drag on their earnings in the last quarter of 2023. It is foreseeable to believe that this will gradually ease over the course of the year.
It is clear that companies reporting in Swiss francs are facing a huge hurdle and this creates competitiveness issues for them against their Japanese rivals, as the yen was the worst performing currency in 2023 falling 15% against the franc. Although the pharma and food sectors are relatively countercyclical and are well represented in the Swiss index, both sectors will benefit from a weak franc to sell to Europe.
Many strategists may have thought that "the Swiss franc is short" by 2024, coupled with the slowdown in global growth may favor defensive sectors. It would not be surprising to see European equities outperform by this currency offset by the end of 2024, given that they are currently undervalued, versus Europeans who may be overweight.
So far this year the franc has corrected its price levels and this could be a bullish sign for the SNB. Note that the Swiss franc is largely driven by two factors: global tensions are forcing investors to seek a safe haven currency and the SNB and its policies are the second factor. According to the SNB, the current level of inflation seems to be to its liking, so this could facilitate currency issuance. This bank is so interventionist that exemplifying, in 2022-23 they engaged in currency buying to reduce pressure on imported goods pushing their currency higher. Now with inflation under control, they are again turning their eye to franc appreciation. It is quite possible that the SNB has sold francs to bring this weakening forward, and this is visible after they showed data this month with a big jump in their January foreign currency reserves.
If we look at the 1 hour chart of the SMI, since May 1st the index has been climbing until it hit a brake at the end of the month, again in June it started another upward push until it reached the highs on June 7th and we are currently in a moment of correction. This only seems to be a stop to gather strength. At this moment the price bell is formed by a double bell with the lower part in the area near the lows and the upper part of the bell with the highest current volume in the price zone of 12,000 points. It is foreseeable that the index will seek to break out of the bearish corrective channel to support a new rampant price rise, as it is now one of the key indexes in the Eurozone.
Ion Jauregui - ActivTrades Analyst
*******************************************************************************************
The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and such should be considered a marketing communication.
All information has been prepared by ActivTrades ("AT"). The information does not contain a record of AT's prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.
Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acing on the information provided does so at their own risk.
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