VT - 3 Reasons To Consider EWL

2023-11-09 10:12:15 ET

Summary

• iShares MSCI Switzerland ETF has underperformed other European and global ETFs this year, but we think things could improve from here.
• The economic landscape in Switzerland is expected to improve as we close the year and next year's prospects look better.
• We highlight some of EWL's defensive characteristics which could come in handy.
• We are enthused by the risk-reward on the charts.

Introduction

The iShares MSCI Switzerland ETF ( EWL ), an ETF that focuses on 45 Swiss stocks hasn't enjoyed the greatest of years so far, delivering just marginal price gains of 3% YTD. In the process, it has also underperformed the largest diversified European ETF - Vanguard FTSE Europe ETF ( VGK ), and also the global markets, as represented by the Vanguard Total World Stock Index Fund ETF Shares ( VT ).

EWL may not have set the world alight, but we see merit in this product, and would like to present three broad reasons why it may be worth pursuing.

Economic Landscape Poised To Improve

So far this year, growth conditions in Switzerland haven't been particularly robust. After delivering 0.9% growth in Q1, growth in Q2 came in flat (Q3 numbers are yet to be released), but it looks like there could be an improvement as we close the year. As per the IMF's latest forecast, growth for the FY could likely come in at 0.9%, and after an implied growth of 0.45% in H1, this implies average growth of over 1% in H2.

Investors should also note that the Swiss central bank which was previously largely focusing on inflation control (inflation is now within the central bank's target range of 0-2%), appears to have pivoted towards taking steps that don't damage growth any further. At a time when most economists were expecting the bank to hike its policy rate in September by 25bps, it refrained from doing so, adopting a dovish stance. This was a welcome change as the bank had previously lifted rates by 250bps across 5 successive instances and key industries such as construction were facing the heat.

The central bank's decision to halt rate hikes could weigh on the Swiss Franc's prospects, and consequently abet the export narrative that is vital to the Swiss economy contributing 75% of GDP. It looked like things were easing off here, but the most recent reading in September of CHF23.8bn came close to taking out the record highs seen in February 2022.

All in all, if one looks at growth forecasts for FY24, conditions in Switzerland look a lot better, with the IMF now expecting the economy to grow at 2x the expected GDP growth rate of FY23.

Defensive Characteristics Could Shine Bright

If you're looking for stable, defensive positioning in the global markets, EWL ought to be on your watch list. Do consider that this EWL is largely comprised of defensive stocks, with the pharma sector and the consumer staples sector accounting for the top two sectors (these two sectors alone account for 53% of the holdings). Even in the face of a cyclical downswing, these are sectors that will continue to generate steady demand on account of their relative inelasticity.

Take for instance Swiss pharma sales, since FY15, this segment has consistently grown every year at a CAGR of 3% or so, but last year, in particular, when rates were being lifted at a startling pace, the sales growth was even more remarkable coming in at 7% YoY!

EWL's relative hedging qualities too could prove to be useful for those exploring country-specific options in Europe. If one looks at various ETFs that focus on the top 4 major European economies, you'd note that EWL enjoys the lowest sensitivity towards the movement of the international benchmark - the MSCI ACWI ex USA Index.

You'd be interested to know that after a couple of months of net outflows, EWL witnessed some strong buying activity last month, even as risk aversion in the global markets ramped up in October.

Investors are likely gravitating to EWL as it has a long track record of outperforming its peers in the face of ample downside deviation. This is captured by its superior Sortino ratio.

It also helps that its general monthly volatility profile is also one of the lowest around

Closing Thoughts - Attractive Risk-Reward On The Charts

Finally, we'll close a review of the charts, and here too, there's reason to be encouraged.

The first chart below helps identify if Swiss stocks could garner some rotational interest for those fishing for beaten-down opportunities across the globe. We'd like to think that EWL would represent a decent bet as its current relative strength ratio versus the global ETF - VT, is trading at rather lowly levels, and is a good 11% off the mid-point of the long-term range. This ratio is capable of mean-reverting quite quickly, as we saw earlier this year, and we could witness a similar scenario pan out.

EWL's long case is further augmented on account of the attractive risk-reward dynamics on its own monthly chart. Note that for over 17 years now, EWL has continued to build steady upward momentum in the shape of an ascending channel. If one uses the two boundaries of the channels as guideposts, and pursues a long position at the current price levels, that would translate to an excellent reward to risk ratio of over 4x!

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