Strategists at Goldman Sachs back going ‘long’ on Britain’s FTSE 100 equity index while going ‘short’ on Switzerland’s SMI equity index, arguing that the FTSE’s greater component of cyclical stocks should help it outperform in an improving economic environment.
“More cyclical or more global-growth exposed markets such as the DAX or FTSE 100 should do better than the SMI, which is more dominated by consumer staples and defensives and on a high multiple,” they write in a research note.
“We currently recommend being long FTSE 100 vs short SMI,” they add.
‘Defensive’ stocks - those seen as most resilient to any downturn in the global economy - such as healthcare groups Roche and food company Nestle - dominate much of the Swiss index.
However, more ‘risk-on’ and cyclical sectors such as financials and miners - seen as more sensitive to swings in the economic cycle and which underperform falling markets but outperform when markets rise - carry more weight on the FTSE 100.
Goldman strategists write that uncertainty over the global economy has driven up valuations on the more defensive parts of the equity market, but signs of less stress in the euro zone’s debt crisis may now boost more cyclical sectors, at the expense of ‘safe haven’ defensive stocks.
“The risk premium...has started to come down as sovereign risks in Europe have diminished and as market participants have started to anticipate a turn in the cycle,” they write.
“We expect a further fall in the risk premium along with improved economic growth to reduce investor preference for these ‘safe haven’ stocks.”
The FTSE 100 has risen by around 9 percent since the start of 2013, while the Swiss SMI index has climbed 15 percent, meaning some traders feel the Swiss market has less room for further gains than the FTSE.
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