Swiss equities have strong international exposure. Economic and political developments in Asia and the USA, and to a lesser extent in Europe, are vital for the health of Swiss listed companies, which make more than 90% of their revenue abroad. The calm political and economic environment in Switzerland provides a solid basis for these companies' development, but they are also affected by short- and medium-term trends such as recent political shocks – especially in the USA – and the situation in markets generating rapid growth in value added.
As a result, the surprise caused by 2016's main political events could drive a broad rally in the world's stockmarkets, and particularly in the Swiss equity market. The financial markets' reaction to the UK's Brexit vote proved to be a dress rehearsal for the big US political shock later in the year: the ease with which they overcame June's surprise UK referendum result probably made investors confident that such political upheavals were not capable of destabilising the markets for long. Investors always prefer the certainty of a decision that has been made – whatever the decision actually is – over the uncertainty of an upcoming decision. Events in 2016 bore this out: there was great uncertainty ahead of the UK referendum, followed by a few days of volatility, after which things calmed down. The same pattern was seen around the US elections, but the rally was faster in that case. With the Italian referendum, it took only a few hours for the market to recover. Current statements being made by politicians, based on the improving global economic situation, are instilling greater confidence in consumers and businesses alike. The environment is therefore conducive to a market rally.
Is this the result of political change? We take a rather cynical view: the improving economic situation in emerging-market countries, the stabilisation in the oil price and rising demand for certain other commodities, the flourishing US economy and the slight improvement in European activity provide more tangible and credible explanations of the market rally than the encouraging but sometimes contradictory messages being sent by certain high-profile politicians.
The main lesson is that the markets are capable of overcoming surprising political decisions. It appears to be easier for a country to take a new political direction when its economy is strong. The market rally will probably be driven more by rising interest rates and a slight increase in inflation – which shows the strength of the US economy – than by the decisions of any new political movement, which will take time to implement. Historically, it has always been best to buy equities when interest rates start rising and to sell them when they start falling. The rally could falter if the dollar or interest rates rise too quickly, which would create tough challenges for emerging-market countries. Of course, criticism of international trade will not help share prices to rise, but investors should bear in mind that political decision-making is a slow process. Until those decisions have been made, the natural development of global supply and demand should boost international trade.
As regards the Swiss equity market, the improving global economy, increasing sophistication in emerging-market countries – which are adopting more value-added technologies and automation – and a strong desire to increase productivity are factors that should boost demand for Swiss products. The Swiss market shows good sector diversification. It features companies generating growth in the cutting-edge field of healthcare (targeted therapy at Roche, efficient production of pharmaceuticals at Lonza) and from new technologies involved in the "Industry 4.0" revolution (ABB, U-Blox, Interoll, VAT, Comet etc.), while its banks and insurance companies can help finance and protect assets. The economic upturn, including rate hikes in the USA, should also lead to exchange rates that are more favourable to Swiss exporters. Although the Swiss market has proven capable of coping with a strong currency over the long term – unlike the Japanese market, which shows an inverse correlation to the yen exchange rate – a stable or weaker Swiss franc would obviously benefit exporters based in Switzerland.
After a disappointing 2016, the indicators for the Swiss market are positive for 2017, as they are for the equity asset class as a whole. The fall in Swiss share prices in 2016 has taken the market's P/E ratio down to an attractive 17x, while earnings growth is expected to be around 7% and the dividend yield of 3.3% should prove secure. It is possible that the perceived defensive nature of the Swiss market could initially hold back its performance relative to other markets. We may have to wait for politicians' promises to be tempered by the harsh reality of implementing growth policies before investors fully appreciate the sustained, global growth being generated by Swiss companies.
Eleanor Taylor Jolidon
Swiss & Global Equity Fund Manager
Martin Moeller
Swiss & Global Equity Fund Manager