Diary of a Financier

Swiss Mister

In Capital Markets on Fri 17 Feb 2012 at 11:38

I’m buying the Switzerland Index (EWL) today on the back of a sound thesis…

First off, when I look at the rest of Europe (i.e. the EMU states), I see every country having barely lifted themselves off the mat:

EMU Equity Markets by Country

Juxtapose that with US equity markets, which are setting new highs:

US Equity Markets

Those groups of charts tell two tales: one of a post-mortem region still fighting deflation (Europe); the other of a reflated system (US). In fact, the boom-to-bust European charts closely resemble the NASDAQ (QQQ, above) in the wake of the tech bubble (circa 2003).

Little risk-adjusted opportunity seems to remain in American markets for this short-term oscillation, but I find an interesting chance in the middle of Europe’s rubble: Switzerland.

~~~~

The Swiss stock market today rests somewhere between lowly European indices and lofty American ones.

Of course, Switzerland controls its own currency, the Swiss Franc (CHF)–hence it’s not a member of the EMU. After losing competitive ground on its surrounding trade partners, the Swiss National Bank (SNB) intervened on September 6, 2011 to weaken CHF against the Euro. In fact, the SNB announced an explicit floor to EURCHF at 1.20. I’ve always asserted that market manipulations like currency pegs can only be maintained in the short-term, because eventually “fundamentals are an undeniable attractor to which true value is chained.” Like the ERM I, Asian Crisis, PBoC, and BOJ before them, the SNB will fail to maintain its 1.20 mandate if it persists for too long. However, this game is still in its early innings, and intervention draws nigh with EURCHF currently trading at 1.2073:

EWL v EURCHF- SNB intervention supported stock market despite EU crisis; maintaining 1.20 FX mandate.

That EURCHF bounce will come one way or another, either via EUR strengthening out of crisis conditions or the SNB battering CHF. Both are constructive catalysts for EWL, which obviously moves with inverse correlation to the currency pair (-0.76 correlation recently & -0.34 longer-term). Further, EWL shows correlations around 0.95 with SPX, but only 0.45 historically with PIIGS indices:

EWL v EURCHF (daily & monthly)

Of course, Switzerland has exposure to the PIIGS. Having combed through the macro data and some micro due diligence, I find this a good risk-adjusted trade as opposed to rich US valuations, especially since I’m going to pair it with a renewed short position on the EMU ETF (EZU) in the coming days.

–Romeo

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