The start of the year was perfect for Swiss assets. While the Swiss stock exchange recorded a slight increase in CHF (+4%), the franc lost ground. Ultimately, the Swiss stock market was on the spot (in €), while the world index took 7%. However, we believe that this market remains attractive. Here is why.
A robust market
Undoubtedly, the Swiss stock market is one of the strongest on the planet. Primarily composed of companies active in defensive sectors, it is not volatile and resists well in delicate conditions, which makes it a diversification of choice.
Among its flagship sectors, there is health (34% of the MSCI Switzerland index), thanks in particular to the giants Novartis and Roche (both to buy), as well as Alcon (keep). The largest capitalisation on the Swiss stock exchange is Nestlé (Retain), which is pushing the share of consumer staples in the index to levels close to 20%. Other giants, such as those in the financial sector, make up 18% of the index thanks to UBS and Zurich Insurance (to keep).
It is a market that is not used to the sudden movements that characterise many others and is currently capable of offering regular dividends of 3%. As a result, Swiss equities have a reassuring presence in the portfolio, which helps to limit breakage when investors are nervous.
But far from fashion
How can we explain Swiss equities' disappointing performance? First, if investors are willing to live with dividend levels of about 3% when interest rates are low—as they have done over the past two decades and into 2023—they tend to look for significantly higher returns when the bond market returns are rising and at higher levels, as they are currently the case.
Add to this that if the Swiss stock market is strong, they are certainly not growth companies but rather stocks. The fashionable technology and artificial intelligence sectors are barely present. As a result, the Swiss market does not benefit from the “fear of missing out – FOMO” that drives the performance of many other markets.
As a result, the Swiss market is trading at relatively attractive price levels, is cheaper than the global index, and offers higher dividend levels with a much lower level of risk. These are all assets that continue to make for exciting diversification.
The Swiss franc finally led to the decline
If the performance of the Zurich stock exchange is disappointing, it is also because the franc is losing ground. Faced with fears of recession in the West and war in Ukraine, the franc played its usual role of refuge in 2022 and 2023.
Despite meagre returns, it was highly prized by investors who saw it as a safe investment less susceptible to erosion by inflation than many others, and for a good reason: at its peak, Swiss inflation barely exceeded 3.5%. And when investors began to bet on a rapid fall in policy rates in the US and the eurozone at the end of 2023, the franc appreciated again, as the spread between the US dollar and the euro seemed to be set to shrink rapidly.
However, inflation is persistent in the United States and the eurozone. Policy rate reductions will be smaller than expected a few months ago and begin later in the year. At the same time, in Switzerland, inflation fell sharply, no longer exceeding 1.2% in February. The Swiss National Bank thus won its fight against inflation well before the others.
As a result, it may well start lowering its policy rates (set at 1.75% since June 2023) faster than they have. This is especially true since, unlike its US and European counterparts, it only holds monetary policy meetings four times a year at the end of the quarter. Therefore, a first fall in Swiss key rates could occur in June or at the end of March, making the SNB the first major Western central bank to do so.
A scholarship that will suit you rather well
This prospect is weakening the franc, but this is not necessarily bad news for the Swiss stock exchange. For a long time, the high prices of francs affected companies in this market. First, it necessarily affects their competitiveness in the face of foreign competition, and second, it reduces the value of profits made abroad.
A cheaper franc should relieve them, giving some fresh air to the Swiss market. But beware, the Swiss franc starts at very high levels. Its fundamentals remain strong, partly because the country maintains a healthy fiscal position, unlike most other major economies where debt continues to rise. Under normal conditions, we do not expect a prolonged fall but rather a return to levels closer to its equilibrium value. Zurich will, therefore, not experience the same fate as Tokyo, where the fall of the yen to historic lows has helped push the market to new historic highs.
Swiss equities remain an attractive investment for us. It offers investors who want to build robust and well-diversified portfolio companies with healthy finances, attractive (and highly predictable) dividend levels, and resilience when nervousness increases.
Thanks to these features, they integrate all our fund portfolios, up to 5%, as diversification.
