Key points
- Swiss excellence has been successfully upheld for the past four centuries across several industries, through superior innovation and productivity.
- Swiss companies have continued to defend leading market positions through growth, value-creation and pricing power.
- A strong currency has provided proof of Swiss companies’ high productivity and efficiency, notably their ability to diversify their sources of revenue and control their costs.
Swiss-made excellence
More than four centuries ago, Switzerland’s watchmaking industry laid the foundations of the country’s reputation for quality by engraving watches with the “Swiss made” stamp, which has since resonated across the world as the hallmark of Swiss excellence.
This distinction is continuously nurtured and enhanced with significant budgets for research and development, at both national and corporate levels. Swiss companies have consistently outspent their international peers in terms of R&D as a percentage of sales over the past two decades. The result is that 2021 was the 11th consecutive year in which Switzerland has remained the Global Innovation Index leader, proving that even a pandemic cannot dampen the country’s drive to invest in innovation. Only Switzerland and Sweden have been able to defend their ranks in the top three of this index over the past decade, delivering on superior and sustained innovation potential.
Switzerland has also been able steadily to transition through different economic, environmental, and social contexts. For instance, for some time the country has been running 638 hydroelectric power plants, which account for 59.9% of its total domestic electricity production. The tallest gravity dam in the world, 285 metres high, is to be found in its canton of Valais. The hydroelectric power generated from this dam is enough to cover the annual power consumption of 400,000 households. Also, Switzerland does not operate in heavily carbon-emitting industry segments such as energy or mining and has been a leader in proxy voting and governance, with the Minder Initiative on controlling Swiss executive pay in its listed companies, since 2014. Its main equity index, the SPI, is rated AA (as at the end of December 2021) by MSCI ESG Ratings and has a carbon footprint of only 100 tonnes of carbon dioxide emissions per million dollars’ worth of sales.
The country derives its economic strength from broad diversity across sectors, with high-tech specialisations in agrarian activities, precision pharmaceuticals, and industrial innovation, to name just a few.
Quality growth
Despite the pandemic and restrictive shutdowns, more than 46,000 start-up companies were added to the Swiss Commercial Register in 2020. These new firms spanned various industries: craft trades, consulting, real estate, finance. While only two businesses were introduced into the Swiss public equity market that year, 2021 saw the return of strong IPO activity with five new listings across different sectors. With 219 companies currently forming the SPI, the Swiss equity market’s size has grown larger than CHF 2 tn in market capitalisation, with more than CHF 600 mn in Swiss small and mid-cap listed firms.
Numerous Swiss companies are global leaders in their segments, are in growth markets, have high entry barriers linked to strongly innovative products, and have the respect and trust of their customers. With these characteristics, they are similarly able to deliver high and improving levels of CFROI® (Cash Flow Return on Investment – Source: Credit Suisse HOLT), or in other words, high absolute and relative value creation. Over the long term, this can also be linked to those firms’ intrinsic pricing power, especially among those with high innovation levels.
Pricing power is expressed in varying ways. One is the company’s ability to pass on higher input prices, either through regular pricing rounds or through contractual arrangements which call for a pass-through of raw material prices. Another approach is to improve the mix of products, with a higher composition of new products at new price points. Higher prices can be justified if the product is able to demonstrate greater added value to customers – which is why innovation is crucial. Some innovation also allows for a higher level of efficiency in production (less use of raw materials or general input costs, such as labour, by increasing automation). These qualities are beneficial to both the revenue and the cost sides of the profit equation under any market cycle, notably in the face of rising inflation or currency strength.
Strong currency
The Swiss franc has long been considered by investors a safe haven relative to other currencies, reflecting the stability and independence of the Swiss economy and financial system. It is important to note that currencies trade in pairs; therefore, a strong CHF is often measured against a weaker EUR, on the back of the 2008 financial crisis, the 2011 eurozone crisis and the 2015 unpegging of the CHF. The Swiss National Bank, operating free from political pressure and working with negative interest rates since 2015, has continuously expressed its willingness to intervene in the foreign exchange market to stabilise the currency.
Nevertheless, Swiss companies with roughly balanced regional revenue exposures across Europe, the US and emerging markets, have been able to mitigate the effects of currency fluctuations by diversifying their income sources over the years. Furthermore, many Swiss companies are well established and operate overseas close to their consumers, reducing translation and transportation costs as well as being insulated from global supply chain disruptions. Innovative and efficient business models have proven yet again to be at the core of Swiss firms’ superior and sustainable value creation.
UBP’s Swiss & Global Equity team