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Get Out Of Swiss Stocks Now: Barclays

By Michael Ide Swiss stocks took a beating yesterday (and are falling again today) after the Swiss National Bank ’s decision to end the 1.20 cap on the EUR/CHF exchange rate. But if you are a non-CHF investor the exchange rate shift more than made up for falling stock prices, pushing the Swiss Index up in USD even as it fell in CHF. Barclays PLC analysts Dennis Jose and Ian Scott think this is the perfect opportunity for those non-CHF investors to get out (although many would have argued that before the big drop would have been a better time). “The sudden appreciation of the Swiss franc has provided a windfall to non-Swiss denominated investors despite the decline in the stock market in domestic currency terms,” they write. “We advocate switching out of Swiss stocks into Euro Area stocks now… if as per our FX view, the CHF weakens hereon, the benefit to non-CHF returns should no longer be there.” Non-CHF investors should take advantage of temporary exchange rate effects: Barclays The obvious reason to take yesterday’s gains and get out of the Swiss market is that Swiss companies are expected to face earnings pressure now that their currency has gotten stronger. The SNB has said that the strength of the Swiss franc is still a concern, part of the reason Jose and Scott expect it to depreciate by other means, but it probably won’t return to the 1.20 EUR/CHF exchange rate naturally any time soon. Non-Swiss investors who stay invested risk watching the beneficial exchange rate effects wear off while stock prices continue to struggle and dividends probably get reduced. (click to enlarge) European QE could undermine the Swiss stock market The other reason to worry about Swiss stocks is the effect that European QE would have on Switzerland. Swiss stock market gains have been inversely correlated with German Bund yields for more than a decade. If that relationship continues, then when ECB QE pushes yields higher it would also pull Swiss stock prices down. We won’t know officially whether the ECB is going to start buying sovereign bonds until January 22, but all signs point to yes – the SNB decision being the most recent signal. Investors who wait until the end of the month to make their decision by may not be able to exit quite as easily. Jose and Scott removed Credit Suisse Group AG (ADR) (NYSE: CS ) and Adecco ( OTCPK:AHEXY ) from their recommended European portfolio and replaced them with Airbus ( OTCPK:EADSY ) and Publicis ( OTCQX:PUBGY ). (click to enlarge) Disclosure: None Editor’s Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks. Now that you’ve read this, are you Bullish or Bearish on ? Bullish Bearish Sentiment on ( ) Thanks for sharing your thoughts. Why are you ? Submit & View Results Skip to results » Share this article with a colleague

A Value Approach To Rebalancing Out Of U.S. Stocks

Summary I will present an approach to use Shiller P/E to value-adjust portfolio weights when rebalancing for 2015. Interestingly, of 13 developed and 12 emerging market countries evaluated, the U.S. is the only country currently in the top quartile of its historic P/E range. With the exceptions of the U.S., Switzerland, South Africa and Thailand, every developed and emerging market country’s P/E ratio is currently below its historic median. 2014 was unexpectedly a solid year for U.S. equities. Many predicted that the multi-year bull market would not continue, but yet the Vanguard Total Stock Market ETF (NYSEARCA: VTI ) managed a 12.6% total return. The same fortune could not be said about the Vanguard FTSE Developed Markets ETF (NYSEARCA: VEA ) (-5.7%) or the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) (+0.6%). In rebalancing, I have in years past kept things simple and diligently rebalanced my stock portfolio to the same target weights (note this is not my entire portfolio – I also hold bonds, REITs, and individual value stocks): Index Stocks Wt. Total U.S. 50% International Developed 25% Emerging Market 25% The S&P 500, as mentioned in my previous article on market valuation, is ridiculously high. Using a few valuation metrics, history would suggest the U.S. market is due for a correction. I will certainly reduce my exposure to U.S. stocks, as I would normally in rebalancing. However, based on the current relative level of the U.S. market, I consider the traditional rebalancing approach of reducing my U.S. total stock position down to 50% insufficient if not foolish. I have done enough comparisons over time and cross-sectionally to sit idle. Instead I want to reduce my U.S. allocation further, while maintaining the same stock exposure. In this article, I will present an approach to use Shiller P/E to adjust rebalancing weights for value in 2015. My intent is NOT to actively manage my ETF portfolio, but instead to set periodic weights (once a year) based on market valuations and rebalance to them. I encourage your feedback on this disciplined simple mix of passive rebalancing with value investing. Country Price-Earnings ratio boxplots I credit Research Affiliates LLC for providing the historic ranges of Shiller Price-Earnings ratios for developed and emerging market countries (all countries have at least 19 years of data). The chart below shows the range of P/E ratios for U.S. versus International Developed countries in a boxplot with the current value in blue, the line representing the lower 25% and upper 25%, and the box representing the middle 50%. The countries shown represent 90.1% of the Vanguard FTSE Developed Markets ETF. Interestingly, only the U.S. is in the top quartile of its historic range. Also note in absolute level, it has the highest P/E ratio. The U.S., at 27.1 times earnings is 2.2 times higher than the next highest developed country, Japan. Since I do not have the entire distribution to calculate the current percentiles (and create an average percentile), I instead rate each country with a number 1 through 4 that represents which historic quartile its current P/E ratio stands in (from top to bottom). Thus, the U.S. scores a 1 and the portfolio weighted average score for the International Developed countries is 3.32. (click to enlarge) Next I will show the U.S. versus Emerging Market P/E ratio boxplots. Note, these countries represent 94% of the Vanguard Emerging Markets Stock Index ETF. Once again the U.S. is alone in the 4th quartile of its historic range and is has a higher P/E ratio greater than the emerging market country with the highest P/E ratio (Mexico) by 6 times earnings. Using the same quartile scoring approach as the U.S. and International Developed countries, the Emerging Market average score is 3.26. (click to enlarge) Country P/E deviations from median Next, I measure the percent deviation from the historic medians for each country. I omitted adding medians on the boxplots to avoid cluttering them. The U.S. P/E ratio is currently 70% above its historic median. With the exceptions of Switzerland, South Africa and Thailand, every other Developed and Emerging Market country is currently below its historic median. Also note, these three are only modestly above their medians (within 20%). Brazil, Russia, and Italy are all 35% below their median P/E ratios or lower. (click to enlarge) (click to enlarge) Conclusion: New Portfolio Weights Using the three quartile scores, I recalculate my new portfolio weights by ranking them with adjustments of (-10%, 0, and +10%). Since the International Developed and Emerging Market scores are so close, I give them both weight increases: Stock 2014 weights Avg. P/E Quartile Weight adjustment 2015 weights Total U.S. 50% 1.00 -10% 40% International Developed 25% 3.32 +5% 30% Emerging Market 25% 3.26 +5% 30% Total 100% 7.58 0% 100%

The Swiss Remind Us Why You Should Always Own Some Gold

Swiss Franc moves throw a wrech in the global currency picture on Thursday. Gold rallies on the news. We think that some capital should always be allocated to gold. By Thom Lachenmann The overnight news about Switzerland left the markets in a frenzy this morning and were no doubt beacons of both fantastic and horrifying news for FX traders who missed the trade and woke up to mayhem. Switzerland’s central bank stopped pegging the franc to the euro, a move that we really can’t blame them for. In trying to “defend” the Swiss franc, the Swiss national bank had ran up quite a bill. So, they let the dam burst, and burst it did. It was a rule put in place in order to keep the currency from getting too strong, a concept that we find ridiculous to begin with. Currencies, of course, get stronger and weaker based on the overall health of the nation’s macro economy. Limiting the strength of your currency is a dopey thing to do, unless you’re an equity market trader with a full scale bullish position. Switzerland’s tactic of lowering interest rates on the franc while doing this didn’t seem to help at all and the franc skyrocketed to all time highs today. Euro to Swiss Franc Exchange Rate data by YCharts Of course, with the whole world expecting Europe to implement some type of economic stimulus, the Swiss Central Bank could have had a real quagmire on its hands trying to defend its currency if there was a flee from the euro. When countries stimulate the way the ECB could potentially do, it generally causes the currency to devalue in a sharp fashion. We were reminded of the benefits of having some gold in your portfolio today, as well. The commodity was up nearly 2% on Thursday after the Swiss news hit the wires. We think there’s a couple reasons that gold got the boost. First, obviously, people that are having “flights to safety,” as Reuters called it, are simply getting into the precious metal as a portfolio hedge or as a safe haven for capital. Secondly, we believe that the notion of Switzerland unpinning their currency from a major national bank reminds people about the true value of gold, when looked at as a non-recurring resource. Gold is held in reserves by these types of central banks for these reasons, and today’s move by the Swiss shows that not ALL countries have drifted into the “Keynesian Dream” that the US, China, and ECB are in. Swiss equities were crushed, down 11% when U.S. markets opened on Thursday morning. When countries take the “unpopular” but safe moves of thinking Austrian, gold flourishes. This type of move is a nice subtle reminder to note when we’re always going to think of gold as a great safe haven for investors and something that a well balanced investor should always allocate some portion of their capital too, whether it’s through funds or the physical commodity.