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洞见 23.11.2017

Swiss equities: Investing in global growth

Swiss equities: Investing in global growth

The Swiss market relative to the MSCI World has delivered significantly higher returns with lower volatility and lower drawdowns.


Key points

  • We believe this is thanks to the market’s diversification, with a mix of high-quality defensive companies and niche, innovative players which both can deliver growth.
  • The above average value creation, expressed by the very high level of CFROI (cash flow return on investment) generated by Swiss companies, is the main reason for the sustainable outperformance of the Swiss equity market.
  • The headwind of the strong CHF, a consequence of the healthy Swiss economy and low level of indebtedness, is a discipline companies have learnt to overcome by generating higher value and exercising higher productivity in order to remain competitive.

  • In the near term, the appreciation of the EUR is likely to be helpful for Swiss company reported sales and, to a lesser extent, earnings.
  • Any devaluation of the CHF against major currencies is helpful for sales growth expressed in CHF.
  • Note however, that this is mostly a translation, less a transaction effect, as Swiss companies are well organized in terms of matching costs and sales where possible.
  • Switzerland is 3.4% of the MSCI World, the 7th-largest country weight and Swiss companies generate one of the highest returns on equity (ROE), illustrating their high efficiency and high value-add products and services.
  • Swiss companies’ industry leadership is a reflection of long-established global market presence, competitive advantages and high value-added products/services. Ultimately leadership and sustained innovation create strong pricing power.
  • Swiss equities have delivered attractive risk-adjusted returns, compared to other developed markets.
  • The relatively high correlation to other developed countries and to the world is partly explained by the fact that mostly export oriented Swiss companies generate a large part of their sales internationally: more than 40% with Europe, 30% with the U.S. and 17% with Asia Pacific. Exposure across various geographies to the Emerging Markets therein is estimated at 34%. Bearing in mind the strong presence of suppliers quoted on the Swiss Market, the full exposure to geographies ex Western Europe is higher, if the final end product, to which the supplier has contributed, is taken into consideration.
  • The Swiss equity market is characterized by companies which are often global leaders in their respective segment and therefore exposed to global economic growth.
  • In terms of valuations, Swiss equities are in line with their historical average. With the price earning (PE) ratio for the SPI at 17.5x earnings in 2017 and 15.9x earnings for 2018, Swiss equities are close to the US equity market valuations and a bit higher than global equities (PE = 15.7x 2017 and 14.3x 2018). Swiss equities trade at a justifiable premium to European and EM equities, due to their higher and more sustainable cash flow returns on investment (CFROIs).

What could be the impact of a regime change on Swiss equities & on our funds?

  • The U.S. 10-year Treasury rate is currently around 2.20%. The Swiss interest rates have been in negative territory since 2014 and the SNB is un-likely to raise interest rates in the near term in view of the current macro-economic conditions in Switzerland. The SNB and the FINMA acted ap-propriately to avoid the property market overheating and the results from these measures are encouraging.
  • The reversal of unprecedented monetary policy measures will be controlled. We are at the beginning of rate hike cycle and it should be supportive for global equities and therefore Swiss equities.
  • Were interest rates hikes in the US to be sharper than currently expected, there could be a short term knock on negative effect on Emerging Markets stock exchanges and currencies. However, we would not expect a long term effect either on currency or economic activity. The pick-up in GDP growth in Emerging Markets is not slowed by US interest rate hikes and GDP growth in EM is supportive for Swiss and Global equity.
  • Were there unexpectedly to be a regime change in 2018, and global GDP and company earnings growth to slow, the Swiss equity market may regain its safe haven status and be an interesting relative play against Global and regional markets. The high and stable CFROI generated by Swiss companies, the balanced geographic exposure, the market’s large healthcare and staple sectors tend to attract investors in periods of uncertainty, leading to less downside risk.
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