It's almost time for investors to switch their attention from quality names with rich cash flows to value stocks.
This is according Paul Schibli, head of Swiss equities at Mirabaud, who has shifted over the past month towards more cyclical value stocks in his Mirabaud - Equities Swiss Small and Mid Cap strategy.
‘Investors got the deflation story wrong. We think that in terms of global growth we are going to see a brighter picture in 2017, especially for cyclical names and financials,’ he said.
One of the financial names the fund manager holds in his portfolio is insurance company Baloise, which demonstrated strong underlying results in the first half of the year.
‘The name was significantly hit by reserve strengthening in Germany, which puts the company in a position to benefit from higher earnings growth going forward. This means that today’s earnings might look "distressed" but future earnings will be significantly higher.’
In the cyclical space Schibli likes Oerlikon Group, which has 85% of the business in service technology.
‘Oerlikon Group is a nice turnaround story. Its textile division went through a huge restructuring program and its break-even point became reasonable. On the back of a five-year plan in China the textile industry could benefit going into 2017 and 2018.’
Generally, the fund manager is underweight financials as there are a lot of cantonal banks and property stocks in Switzerland, which he considers to be expensive.
‘For the time being real estate still shows good figures backed by very low interest rates in Switzerland and people are buying it as an alternative to both bonds and equities. But we think the valuation of the 25% NAV premium is too high.’
However, Schibli said in the small- and mid-cap banking sector there are a couple of turnaround candidates, for example EFG and VZ.
‘EFG has taken over BSI bank and we want to see this merger finalized before we buy into the name. VZ is in the growth mode and in the current environment it might be difficult to grow successfully.’
Betting on technology
When talking about healthcare Schibli said the small- and mid-cap benchmark has no exposure to such big pharma players like Novartis and Roche.
In this particular sector he likes such medical care names like Sonova.
‘In the long term Sonova made the right decision to acquire a German retailer because the sales is one of the most important points. GM Sound has probably a better portfolio but with the new product launch coming in the end of this year Sonova will catch up with its competitor and win the share of the market back.’
The fund manager is overweight technology, where he sees a lot of succesful Swiss niche players. One stock he holds in the space is Temenos, which produces software for banks.
‘We like Temenos software because in the current environment banks have problems such as lack of growth, too much regulations that lead to lower margin profitability. This kind of software will help banks in the coming years to make a transition into increasingly more digital world.’
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