By Samuel Indyk and Alun John
LONDON (Reuters) - Investors have been pouring cash into Swiss stocks in the hope that this export-focussed market will outshine its peers, in part thanks to a shift in central bank policy that could knock the franc further off 2023's multi-year highs.
Analysts say this quarter will probably remain tough for exporters with the franc still trading at elevated levels, but expectations this might change soon are already setting the tone for the market.
Swiss-domiciled funds recorded their largest monthly net inflow since July 2022 last month, and positive net flows for the last three months, according Morningstar Direct data.
The main Swiss index (SMI) also caught up with Europe's STOXX 600 index - with both up 2% so far this year - after it rose just 3.8% last year, lagging a 12.7% gain for the European benchmark.
Currency strength was part of the problem, as many large Swiss firms make much of their revenues abroad, but report earnings and pay some costs in francs, meaning their overseas revenues shrink after being converted.
Currency moves accounted for almost 25% of the SMI's relative performance in the past 10 years, according to analysts at Kepler Cheuvreux. This was particularly acute last year, when the franc hit its strongest since 2015 against the euro and the dollar.. The franc is the only major currency that outperformed the U.S. dollar through the last two years.
Companies including pharmaceuticals giant Roche and watchmaker Swatch, cited the currency as one drag on their fourth-quarter earnings. Analysts expect that effect to peak this quarter, but gradual relief later in the year.
"The first quarter of 2024 will see the most negative effect (from the strong franc) in our view," said Thomas Jaeger, senior portfolio manager at Mirabaud Asset Management.
"Companies reporting in Swiss francs face a huge headwind."
Jaeger says Swiss companies had particularly hard time competing with rivals from Japan. The yen was the worst performing major currency in 2023 and fell 15% against the franc, its second-biggest yearly fall in at least 40 years.
TURNAROUND
But a turnaround could be on the cards. The franc is down a touch against both the euro and dollar in 2024 so far, and the outlook could favour companies that would benefit from a softer currency.
"The Swiss franc is almost always driven by two things, global tensions driving safe haven flows, and the Swiss National Bank," said Samy Chaar, chief economist at Lombard Odier in Geneva.
"Now, conflicts around the world remain localised, and without significant escalation, so that's not driving the Swiss franc higher, while there has been a big change with the SNB, as it is comfortable with the current level of inflation," he said.
The SNB is one of the few major central banks that intervenes in currency markets to fine-tune monetary policy. It bought francs in 2022 and 2023 to boost the currency and reduce imported price pressures.
Now, with inflation back within the central bank's target range, its focus may shift again to putting a brake on franc appreciation. SNB Chairman Thomas Jordan acknowledged last month currency strength could have a negative impact, particularly on exporters.
The SNB could even have sold francs to weaken the currency, analysts said earlier this month after data showed a big jump in its January foreign currency reserves.
Kepler Cheuvreux, which recently upgraded Swiss stocks, given their resilience to economic swings, said a weaker franc would further boost their appeal.
Pharmaceutical and food companies whose products see fairly consistent demand regardless of the economic cycle are well represented in the Swiss index.
"A depreciation of the franc would be a positive for Swiss equities overall, as most are operationally exposed to markets abroad. The Swiss equity market is among our most preferred geographies in Europe," it said in a note.
Nomura currency strategist Yusuke Miyairi said SNB could cut rates sooner than its peers given inflation was coming below the Swiss central bank's forecasts and he favoured selling the franc in particular against the higher-yielding pound.
Miyairi also noted Jordan's comments on the franc's strength posing problems for Swiss companies.
"These encouraged the market to think 'short Swiss' is the trade for 2024," he said.
Another motivating factor for investors are expectations for a slowdown in global growth, which would favour defensive sectors.
For this reason, Bank of America European equity strategist Andreas Bruckner said he expects Swiss stocks to outperform European stocks by 8% by the end of 2024 and the bank rates them as "overweight."