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洞见 02.12.2020

Swiss Small and Mid-Cap Equities – Consistent value creation

Swiss Small and Mid-Cap Equities – Consistent value creation

The Swiss economy has once again proven its resilience during the Covid-19 pandemic, as reflected by year-to-date outperformance in the Swiss equity market and also its small and mid-cap segment. 


Key points

  • Several Swiss companies across all market-cap segments have benefited from the disruption caused by the pandemic, since they have exposure to underlying long-term trends that have been accelerated by the crisis.
  • However, the strongest argument for exposure to Swiss equities within a diversified equity portfolio remains the consistent long-term outperformance of Swiss equities, driven by their superior value-creation and ESG profiles.
  • An active investment approach, driven by fundamentals and supported by extensive expertise and knowledge of the market, has led to an impressive track record and substantial AuM growth for UBP’s Swiss equity franchise over the last 14 years.

Switzerland and Covid-19

As in previous crises, the safe-haven status of the Swiss franc and an inflation rate of only 0.2% (as of the end of 2019) have helped Switzerland weather the storm in the past few months. The country has an independent central bank that operates free of political pressure: the Swiss National Bank has been working with negative interest rates since 2015 and has intervened in foreign exchange markets when necessary to absorb external shocks and ease upside pressure on the Swiss franc.

Switzerland’s fiscal stability allowed the country’s parliament to act quickly and adopt a substantial aid package of CHF 57 billion to support the domestic economy.

In addition, the Swiss loan programme, developed through close collaboration between the government and Swiss banks to offer SMEs quick and easy access to loans to cover their immediate liquidity needs, has won international acclaim.

In the first few volatile months of 2020, movements in the Swiss equity market reflected the solid standing of both the country and its companies: Switzerland outperformed most major global equity markets by limiting the downside while at the same time participating in strong rallies. The SPI Extra – Switzerland’s small- and mid-cap index – has shown similar resilience compared with major global and regional indices, both year-to-date and over the longer term.

Performance of major equity markets (%)

The 2020 EPS growth estimate for global equities has remained steady at around -19% over the past few months, while the 2021 estimate now stands at almost +30%. Expected regional earnings growth rates for 2020 range from +0% for China to -39% for the UK and the eurozone; for Switzerland, analysts expect a comparatively small 10% decline in EPS.

Swiss companies are innovation leaders in various industries, probably most visibly in medical technologies. Close to 700 Swiss companies specialise in this field, ranging from big players such as Novartis, Roche and Lonza, to listed small- and mid-sized companies such as Tecan, Vifor Pharma and Straumann, as well as a host of privately-owned companies.

In the small- and mid-cap segment, IT specialist Logitech and medical lab supplier Tecan have been among the strongest contributors to the SPI Extra’s year-to-date performance. As well as these companies, several others in the Swiss market have benefited from positive newsflow, across various sectors and market-cap categories.

Consistent, long-term value creation

Despite its small size in geographical terms, Switzerland ranks fifth in the MSCI AC World index, with a 3% weighting and a total market capitalisation over CHF 1.3 trillion as of June 2020. Swiss equities offer a lower correlation to global equities and are supported by a strong underlying currency, which can benefit investors seeking real returns. Most sectors and companies have adapted to the currency’s strength; for instance, the pharmaceutical industry, which accounts for a significant share of exports, boasts strong pricing power as it is less affected by short-term economic fluctuations. Meanwhile, some small- and mid-cap companies are indispensable to their large global customers and have cemented leading market positions in their respective industries.

As mentioned previously, Swiss equities, especially in the small- and mid-cap segment, tend to outperform global equities over both short and longer time periods. When we factor in relative volatility, Swiss equities are even more attractive, as they deliver one of the highest risk-adjusted returns of any major equity market.

This consistent outperformance is linked to high levels of value creation, as measured by the positive differential between cash flow return on investment (CFROI) and cost of capital in the Swiss & Global Equity team’s investment framework. Historically, and until recently, Switzerland has consistently delivered CFROI significantly in excess of other regional markets. It is worth noting that the quality and value-creation potential of the small- and mid-cap segment has been improving over recent years, as reflected by its strong outperformance over the period.

As passive investment options in Swiss equities are somewhat limited and concentrated on large caps, an active investment approach is the best way to gain exposure to the small- and mid-cap segment’s substantial value-creation potential. As the segment receives much less coverage from sell-side analysts than SMI stocks, there are also ample alpha opportunities that can be exploited by active managers with the experience and expertise of UBP’s Swiss equity franchise.

As of September 2020, UBP’s active Swiss equity strategies – delivered through UCITS and Swiss contractual fund structures and built on the CFROI life-cycle framework – had track records of more than 14 years for the flagship Swiss Equity strategy (since 30 June 2006) and five years for the Swiss Small- and Mid-Cap strategy (since 30 June 2015). Both strategies show sustained, enhanced value creation compared with their respective benchmarks, as well as superior ESG profiles relative to global equities.

The historical sector breakdown of these strategies shows a consistent and balanced sector allocation over time, while stock selection has always been the main driver of returns for both of them. A fundamental bottom-up investment process is key to delivering superior value creation over both the short and long term. UBP’s Swiss equity strategies remain well positioned for both short-term momentum and underlying long-term drivers, without the need to time markets or themes.

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