EWL - EWL: Resilient At A Price

2023-08-23 15:06:14 ET

Summary

• EWL is exposed to some of Europe's most well-known stocks.
• Large allocations in healthcare and consumer staples make the ETF resilient.
• However, the resilience comes at a price and ultimately there's no reason to go overweight.

The iShares MSCI Switzerland ETF ( EWL ) covers some European stalwarts who happen to be listed on the Swiss markets. On balance, the exposures are fairly priced. In more beleaguered issues multiples are lower, in more robust issues the multiple is higher. In all, there isn't much reason to buy EWL. But it does tell us what major consumer staples companies are doing on the inflation front, and that inflation is probably alive and well in Europe.

EWL Breakdown

The following are the EWL top holdings:

There's a fair bit of skew towards the top three which can be discussed individually.

Nestle ( NSRGY ) is actually seeing slight volume pressures which is not the biggest surprise. However, downtrading effects were actually smaller than we might have expected. The pricing is up more than 9% on average across its products, with volumes being essentially flat. That there weren't more volume hits is a little surprising, but together with other major earnings releases in the West, we are seeing quite a lot of resilience in terms of spending by consumers showing across the consumer staple industry. On a CC basis, they are accomplishing solid 11% earnings growth, with the Nestle multiple unsurprisingly staying above the 20x mark in P/E - probably a reasonable valuation at this point of the cycle still.

Roche ( RHHBY ) is under a bit more pressure on the results side due to diagnostics exposures that were buoyed by COVID-19 diagnosis rates. Those revenues are unlikely to ever return, and while the bulk of the pressures on diagnostics revenues are likely in the rear-view mirror, there are still coming pressures on the pharma business that will continue to weigh on performance. The multiple below around 13x makes sense.

Finally, there is Novartis ( NVS ), which is planning on spinning off its Sandoz division much like Pfizer ( PFE ) spun off Upjohn some years ago, which became combined with Mylan into Viatris ( VTRS ). After the spin-off, PFE's value did not decline meaningfully at all, implying that the PFE investors did not really value the Upjohn generics business that highly. Still, as part of Viatris, Upjohn had value, and the transaction was pretty successful. While Sandoz will not be combined after being spun off, there is at least some precedent of the OriginCo shareholders seeing some benefits from a generics spin-off. Not too bad of a pick at 15x P/E in light of the coming move, but nothing fantastic either.

Bottom Line

The average ETF P/E is around 22x, which is quite pricey, but it comes with the territory of being substantially exposed to healthcare and consumer staple stocks, especially when they are some of the larger and more famous brands.

Sectoral exposures point to a good degree of sectoral resilience come-what-may in terms of economic outlook, which is more useful for the European wallet than the American one considering Europe's exposure to what could be a difficult winter in terms of gas access and prices. However, the continued resilience of the Western consumer, and the fact that the continued fall of Chinese industry will take pressure off global commodity prices means that likely we are going to see some further easing in headline inflation on top of cooling down spending habits. Nonetheless, as a cycle-agnostic play, EWL does provide some degree of hedging against possible economic troubles, but ultimately at a price that doesn't compel any overweighting.

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