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The last few trading days have significantly impacted SMI. While the main Swiss index was comfortably above 11,000 points on October 11, 2023, it was trading at only 10,448 points at the close of October 19. This means that performance has been significantly negative since the beginning of the year, a decline of 4.3 percent since then. Other major indexes, including the German DAX and of course the US S&P 500, are also on the rise this year, despite recent losses.
The SMI also doesn’t cut a good number when you compare how far below the various indices’ all-time highs. For example, the S&P 500 is 9.5 percent below its all-time high, while the DAX is 9.1 percent. SMI, on the other hand, has lost a painful 18.2 percent from its all-time high. No wonder many Swiss investors are wondering what is going on at SMI. Why is it at the bottom of these indices?
To answer this, it is worth remembering that European markets are dominated by cyclical sectors such as industrials, financials and energy, while US markets have been dominated by technology superstars for several years. SMI, on the other hand, is determined by three defense heavyweights, the two pharmaceutical giants Novartis and Roche, and the food company Nestlé. It would also be beneficial to extend the observation period a little. So you should look not only at the price development since the beginning of the year, but also at the performance over the last five years, for example.
The chart shows that the indices improved rapidly from 2018 to mid-2020. The S&P 500 then outperformed the other two as tech superstars posted strong gains. But SMI and DAX also increased greatly from March 2020 to the end of 2021 because market players assumed that the epidemic and new drugs, for example, would bring tons of money into the coffers of pharmaceutical companies Roche and Lonza. DAX also benefited from software companies such as SAP.
In Switzerland, the influx of liquidity from central banks not only caused the price of UBS to rise, but also cyclical stocks in SMI, including luxury goods group Richemont and logistics company Kühne & Nagel. But all this had an impact on valuations: Swiss stocks were extraordinarily expensive at the end of 2021.
Roche and Co. On par with tech superstars
This can be seen, for example, in the EV/Sales key figure. EV stands for Enterprise Value, which is a company’s market value plus debt minus cash assets. Sales are last year’s sales. This key figure is an indicator of how expensive a company or index is. At the end of 2021, SMI’s EV/Sales ratio was 3.3. For the S&P 500, this ratio was 3.4. While the SMI reached almost the same valuation levels as the S&P 500, which is dominated by technology stocks, the DAX was valued much more positively.
However, the EV/Sales ratio only reflects sales, not profit. Therefore, you should also look at the EV/Ebit ratio. EBITDA is earnings before interest and taxes. At the end of 2021, SMI and S&P 500 were almost the same price in terms of EV/Ebit, while the DAX was significantly cheaper. This situation changed over time; Today SMI is as cheap as DAX while S&P 500 remains expensive.
The reason for this situation probably lies in the driving forces of the rise experienced in the last twelve months. On the one hand, there was the illusion of artificial intelligence enjoyed by US tech superstars, but also companies such as German software company SAP. Many S&P500 and DAX companies also benefited from the increase in military spending (such as defense companies Lockheed Martin and Rheinmetall).
However, SMI does not have any defense or software companies; Accordingly, growth over the last twelve months has largely bypassed Switzerland. On the contrary, some companies such as Roche and Lonza, which were strong in the post-Corona rise, began to weaken. It turned out that high expectations after the pandemic were exaggerated.
However, with some delay, a similar picture is likely to emerge for the DAX and especially the S&P 500: Expectations are too high and will probably be revised downwards in the next few months.
For private investors, this means: SMI is cheaper than the S&P 500. At the same time, the prospects are better than for the German industry, which has been deprived of cheap Russian gas for some time. Therefore, SMI is likely to show defensive qualities in the next few months and regain strength over the S&P 500 and DAX.
This doesn’t mean the SMI can’t fall further. But if the stock market environment remains difficult, it will likely do so to a lesser extent than the DAX or S&P 500. Not only because it is heavily influenced by defense companies, but also because it entered the correction phase earlier than foreign companies. It is slightly ahead of the indices in terms of correction need. From this perspective, switching to US or German stocks is not recommended at this stage.
Source :Blick
I’m Tim David and I work as an author for 24 Instant News, covering the Market section. With a Bachelor’s Degree in Journalism, my mission is to provide accurate, timely and insightful news coverage that helps our readers stay informed about the latest trends in the market. My writing style is focused on making complex economic topics easy to understand for everyone.
