Swiss Stocks Worst in Developed World as Rally Bypasses Nestle

By Daniela Silberstein and Julie Cruz

June 12 (Bloomberg) -- The rally in global stocks prompted by investor expectations for an economic recovery is leaving Switzerland behind.

The benchmark Swiss Market Index of the country’s 20 largest companies has fallen 0.9 percent this year, the worst among the world’s 20 biggest markets in developed nations, according to data compiled by Bloomberg. It’s also the most expensive in western Europe, with the SMI trading at an average price of 2 times the assets of its companies.

Switzerland’s so-called defensive stocks, which allowed the market to avoid the worst of last year’s 42 percent rout in the MSCI World Index, are holding the country’s equities back this year as investors look for companies that benefit the most in a recovering economy. About 57 percent of the SMI consists of food and health-care stocks, led by Nestle SA, which makes up 22 percent of the market.

“The SMI will continue to underperform as the inflow is into cyclical segments and out of defensives,” said Matthias Fankhauser, a Zurich-based fund manager at Clariden Leu AG, which oversees about $100 billion. Other European indexes “are predestined to benefit,” he said, citing Germany’s DAX.

Fankhauser has cut his holdings of pharmaceutical stocks and is “overweight” so-called cyclical shares such as steelmakers and construction companies whose profits are most tied to swings in the economy.

Novartis, Roche

The SMI, which gets 33 percent of its value from Basel, Switzerland-based drugmakers Novartis AG and Roche Holding AG, rose 0.9 percent to 5,483.85 yesterday. The gauge has gained 38 percent in dollar terms since the MSCI World Index of 23 developed countries began its rebound from a 13-year low on March 9, trailing the global measure’s 45 percent rise.

Every other developed market among the world’s 20 largest has advanced in 2009, with Norway’s OBX Index posting the biggest gain at 41 percent. The five largest emerging markets -- China, India, Brazil, South Korea and Taiwan -- have all surged more than 26 percent.

The only markets worse than Switzerland among 90 indexes tracked by Bloomberg are in developing nations. Ghana’s All- Share Index has lost 37 percent, while the OMX Riga Index has dropped 15 percent in Latvia, where the government is fighting to stave off a devaluation of the lats.

“If the economy stabilizes, cyclicals will benefit and the Swiss market will be left behind,” said Peter Braendle, who oversees $50 billion in European equities at Swisscanto Asset Management in Zurich.

Italy, Germany

Italy’s FTSE MIB Index, which gets about 4.1 percent of its value from makers of drugs, food and household products, surged 83 percent in dollar terms for the biggest advance in western Europe during the three-month rally, data compiled by Bloomberg show. Germany’s DAX, which has added 55 percent, gets about 4.5 percent of its value from health-care, food and household product companies, Bloomberg data show.

Companies in Switzerland’s SMI trade at 2 times book value, or their assets minus liabilities, the most expensive in western Europe, data compiled by Bloomberg show. The index’s price is 1.5 times the combined sales of its companies, also the highest level in the region.

The SMI is valued at 26.6 times the profits of its companies, 29 percent above the five-year average. Only the DAX and the U.K.’s FTSE 100 are more expensive in Europe, with ratios of 27.3 and 31.9, respectively, Bloomberg data show.

‘Slow Winner’

For Huntington Financial Advisors’ Madelynn Matlock, it’s worth paying for Swiss stocks with the fallout from the global recession still battering earnings across the region. While profits at 2,364 companies in western Europe tracked by Bloomberg dropped 49 percent last quarter, earnings per share at health-care companies slipped 2.5 percent. Income for makers of so-called consumer staples declined 9.9 percent.

“The Swiss index is more of a steady index and a slow winner,” said Matlock, a Cincinnati-based fund manager at Huntington, which has $15 billion. “If there is one thing we’ve learned in the last year though, it’s that you don’t want to have all stocks in your portfolio aimed at gaining the most.”

The Swiss National Bank is forecasting a contraction of as much as 3 percent in 2009 for the domestic economy, which would be the worst slump in 34 years. The median estimate of 10 economists in a Bloomberg survey is for a decline of 2 percent.

Nestle’s sales in the first three months of this year unexpectedly fell for a second straight quarter as consumers bought cheaper alternatives to the Vevey, Switzerland-based company’s San Pellegrino and Perrier bottled waters.

Nestle Earnings

Nestle will post a 43 percent drop in net profit this year, the first decline since 2003, according to the average of 16 analysts surveyed by Bloomberg. The shares have underperformed the MSCI World by 34 percentage points in the three-month rally, after beating the MSCI World by 26 percentage points during the bear market that ended in March, Bloomberg data show.

Earnings at Novartis, Europe’s second-largest drugmaker, will be 30 percent lower than in 2007, estimates compiled by Bloomberg show. Profits for Roche, the world’s biggest maker of cancer medicines, will be 3.2 percent below 2007’s level, the data show.

“The SMI is clearly at a disadvantage,” said Urs Eilinger, Zurich-based chief investment officer at Infidar Investment Advisory Ltd., which oversees $3.2 billion. “If you play on an economic recovery, the SMI will underperform.”

To contact the reporter on this story: Daniela Silberstein in Zurich at dsilberstei2@bloomberg.net; Julie Cruz in Frankfurt at jcruz6@bloomberg.net.