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Swiss equities
Preference: underweight

UBS View
SMI (27 June): 5,997 (last month: 5,818)
SMI (6-month target): 6,200

• Swiss listed companies generate a high share of profits in economies outside Switzerland. Consequently, the Swiss equity market is affected by the recent weakening in global growth.
• Swiss companies try to mitigate concerns on the global economic prospects by maintaining tight cost controls. This should allow to maintain relatively robust operating margins in 2012.
• While the Swiss franc remains overvalued, we expect the currency impact to gradually become less of a drag. In fact, at current exchange rates, Swiss companies' earnings would show some positive currency translation effects by end 2012, compared to the previous year.
• Still, the PE-ratio of the market is relatively high compared to the global average, indicating less attractive value. The SMI is trading at about 12.8x realized earnings. We are thus more cautious on the ability of the market to deliver further multiple expansion in a challenging market environment. As a result, we maintain a small underweight stance on Swiss equities.

Positive scenario
SMI (6-month target): 6,900
• Eurozone economic growth reaccelerates meaningfully, providing relief to Swiss financials as well as Swiss exporters. Defensive sectors would likely be left behind in a relief rally. In this scenario, we would expect the equity market P/E to re-rate to 14x and earnings to grow by 5% over the next six months.

Negative scenario
SMI (6-month target): 5,075
• The sovereign debt crisis re-escalates, leading to further downside for Swiss financials and the export-focused Industrials and Materials sectors. In this scenario, corporate earnings could drop by 5–10% over the next six months and we would expect the P/E to contract significantly, toward 11.5x.
Note: Scenarios refer to global economic scenarios (see slide 7)

What we're watching Why it matters
Economic indicators Key announcement dates of domestic economic indicators: 2 July, PMI manufacturing; 27 July, KOF Swiss leading indicator
Monetary and economic policy Key Swiss/European monetary policy dates that can impact Swiss equities: 2 July, SNB meeting; 5 July, ECB Governing Council meeting
Corporate results Key corporate announcement dates that could move the market: 5 July, Barry Callebaut; 12 July, Partners Group; 16 July, Kühne+Nagel; 17 July, Georg Fischer & SGS; 19 July, Actelion; 20 July, Sulzer; 25 July, Rieter & Lonza; 26 July, ABB, CS Group, Logitech & Sika

Recommendations
Tactical (6 months)
• We favor companies with a strong and broad foothold in emerging markets, as well as innovative companies able to market their products and services efficiently and globally.
• We continue to favor large caps.

Strategic (1 to 2 years)
• We like stocks paying high and sustainable dividends.
• Moreover, we favor leaders in regards to the two key Swiss success factors: innovation and globalization.

Swiss market trades at a P/E-premium (based on realized earnings)
[Chart showing P/E ratios from 2003 to 2011/2012]
Source: Thomson Reuters, UBS CIO, as of 25 June 2012
Note: Past performance is not an indication of future returns.

UBS
For further information please contact CIO's asset class specialist Stefan Meyer, stefan-r.meyer@ubs.com
Please see important disclaimer and disclosures at the end of the document.
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