Swiss Stocks Unlikely to Stand Out in New Year

By Neil MacLucas

ZURICH--Switzerland's blue-chip stock index posted a relatively sluggish performance in 2013. Next year, doesn't look much better.

The Swiss Market Index, an equity benchmark that includes 20 of the country's biggest companies, underperformed many of its global peers as tepid growth in the European Union weighed on exports and slow growth at home compounded the situation.

With one trading session left in the year, the SMI is up just about 20% in 2013. Meanwhile, Japanese shares have risen more than 50%; the broad S&P 500 in the U.S. is up roughly 30%; and the MSCI World index, a measure of global share performance, is up about 22%.

As of 1139 GMT, the SMI was down 0.3% at 8197.47.

Analysts and strategists say Switzerland's reliance on the EU is part of the reason the country's equity market has lagged others. The 28-nation bloc buys a little more than half of Switzerland's 201 billion francs ($225 billion) in exports, which range from high-end machinery to agricultural products. The Alpine nation also sells services, such as staffing and recruitment, to the EU.

Swiss exporters are unlikely to get much help next year from the EU, which will be likely be weighed down by fragile economies in southern Europe and difficulties in the banking sector. The European Commission, the bloc's executive body, sees growth of just 1.1% next year, up from zero this year.

"Economic developments in Europe will be key for many Swiss companies,' said Martin Huesler, an equities analyst at Zuercher Kantonalbank, noting plumbing equipment maker Geberit AG (GEBN.VX) and recruitment company Adecco SA (ADEN.VX) because of their reliance on the EU.

Mr. Huesler credited the expansive monetary policy of central banks around the world for driving "surprising gains" for the Swiss market in 2013. Investors will continue looking to equities for yield in 2014, Mr. Huesler said, but the SMI likely won't rise more than mid-single digits.

Companies with greater global reach--such as power technology company ABB Ltd (ABBN.VX), food giant Nestle SA (NESN.VX) and drug makers Roche Holding AG (ROG.VX) and Novartis AG (NVS)--will be less affected by regional issues and therefore be more attractive to conservative portfolio managers, analysts say.

But those companies will still have to navigate a strong franc, which erodes the value of sales in other countries when repatriated to Switzerland. The franc is currently at historic highs against the euro, and is expected to remain strong throughout 2014 because of the ongoing economic difficulties in the EU.

Swiss companies won't get a break at home either.

Economic growth in Switzerland is seen at 2.3% next year, up slightly from 1.9% in 2013. Fewer companies are investing in new equipment because of the discouraging outlook for export growth, which in turn holds back economic growth at home.

Gabriel Bartholdi, an equities strategist at Bank J. Safra Sarasin Ltd., says unimpressive domestic growth, which started to slow in the fourth quarter of 2013, will cap the SMI next year. He sees the SMI hitting 8,400 by the end of 2014, a rise of around 3% for the year.

"The data thus far indicates a slowing momentum of Swiss growth," Mr. Bartholdi said. The first quarter of next year will also be disappointing, he said.

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