In Switzerland, the Swiss franc, which still plays its role as a haven at every sign of trouble, has contributed significantly to controlling inflation more quickly than in most other Western economies. With a high currency, inflation contained, and interest rates already meagre and expected to fall further, Switzerland is returning to its sources as if the pandemic and the surge in inflation had not passed through. However, the Zurich stock exchange has a hard time taking off. Do we still need to invest? We think the answer is yes. Here’s why.
More than ever, it is a haven of peace
The other central banks of the world are watching closely what the US Federal Reserve does, and they worry about the impact it may have on their respective currencies, their bond market, and many more. The Swiss National Bank is not very concerned about this. It, therefore, continues to operate on its own: when US key rates are still in the interval of 4.75%-5.00%, and the primary ECB rate is 3.4%, the SNB reference rate is 1.0%. The situation is similar in the bond market: US 10-year debt has rebounded towards 4.2%, France's exceeds 3.0%, and Germany's is trading around 2.3%. At the same time, investors are prepared to finance Swiss debt with an equivalent maturity of less than 0.5%.
There are many reasons for this popularity. More recently, Switzerland has never experienced the inflation slide that many others have. Price growth peaked at 3.5% in August 2022 before settling much faster than elsewhere. In September, it was no longer above 0.8%.
Other reasons are much more profound and often structural. At a time when debt is slipping everywhere, Switzerland remains exemplary in public finances. The debt is about 38% of GDP, and while others are putting the budget back on track, Switzerland—which had exceptionally allowed a 3.1% budget deficit in 2020—has returned to surpluses as early as 2022 and intends to continue aligning them.
In the current economic climate, the country is a haven, and investors are willing to invest their capital there, even if they are satisfied with a lower return than they could get elsewhere. They see it as the price of securing their assets. This explains why the Swiss franc remains relatively stable against the US dollar despite a hefty interest rate differential and has even appreciated against the euro in recent months. This explains why the Swiss franc remains relatively stable against the US dollar despite a hefty interest rate differential and has even appreciated against the euro in recent months.
Swiss actions: less in sight
Given the investor appetite for exposure to Switzerland, one could expect a booming performance from the Zurich stock exchange. This is not the case. Since the beginning of the year, it has held on to a 10% gain (prices and dividends in €). It is slightly better than the eurozone (+9%) and much worse than China, the US, India or Indonesia, which all show 20% or more gains at this stage.
This unexciting performance is partly due to the composition of the Zurich stock exchange. With very low volatility, it gives pride of place to defensive sectors. Health, finance and consumer goods account for over 70% of the MSCI Switzerland index. While companies like Novartis and Roche (both on the buy, in our view), Nestlé or UBS (both to be retained) are unquestionably strong and worthy of interest, they are struggling to attract the attention of investors looking for the next Nvidia or who seek exposure to high tech values or the promises of artificial intelligence.
As is often the case in Europe, information technologies are not very present on the Swiss index, representing only about 1% of the total. At the same time, they represent 31% of the MSCI USA, even though Amazon, Meta, and Alphabet (Google) are not counted in this category.
In addition, large Swiss companies are experiencing turbulent times. Nestlé has just found a new CEO and is looking for a new impetus. The pharmaceutical giants missed the anti-obesity drugs that made Novo Nordisk or Eli Lilly happy. UBS is still digesting the problems of its merger with Credit Suisse, while the luxury sector remains dependent on weakening Chinese demand for this type of product.
With its long-standing reputation, Switzerland continues to attract foreign capital despite the much lower returns on supply offered by many other markets.
Nevertheless, we prefer to seek our happiness elsewhere on the bond front. The yields on supply are so low that they risk being wiped out if the franc (which is very expensive at this stage) should experience a weakness. A scenario that would be especially plausible if the SNB were to intervene to weaken it.
We, therefore, maintain exposure to Switzerland through the Zurich stock exchange. While its recent performance is not very high, it remains solid and low-risk. Of course, in the time of FOMO (fear of missing out) and the extraordinary gains recorded by tech giants and the US stock market, the Swiss market has a little more difficulty attracting investors. However, on the fundamental level, it remains solid, and the defensive values that compose it will hold it out no matter what happens. So, this investment should hold well beyond the effects of fashion, which remains an exciting diversification.
We continue to invest in it across all our portfolios. Investors fond of individual stocks should buy Bell Food and the two health giants already mentioned (Novartis and Roche).
