Why swiss equities will do well for investors in 2021

Schroders believes the Swiss equity market is well positioned. (Image: Shutterstock.com/William Potter)

Stefan Frischknecht of Schroders draws a comparison of Swiss equities with European equities. For 2021, he sees a number of advantages to a broad Swiss equity allocation or specific Swiss small- and mid-cap exposure.

Swiss stocks performed well in 2020, with defensive heavyweights Nestle, Novartis and Roche outperforming during the Covid-19-related correction. However, at the end of November 2020, these stocks did not stand out compared to the Swiss Performance Index (SPI) or MSCI Europe. In fact, the Swiss market as a whole has performed relatively well thanks to the many leading companies outside the 'blue chip' Swiss Market Index (SMI). The small- and mid-cap index, the SPI EXTRA Total Return (SPIEX), has come close to matching the performance of one of the strongest markets so far in 2020, the S&P 500 (SPX).

Positive towards the Swiss market

"Although, as many strategists predict, it is possible that the more cyclical European markets will catch up in 2021, we remain positive on the Swiss market for two reasons", says Stefan Frischknecht, Deputy. CEO of Schroders Switzerland and Head of Swiss Equities: "First, the three defensive equity heavyweights continue to offer upside to investors. These companies' businesses are performing well, and they offer attractive and growing dividends averaging more than 3 percent. Second, because the Swiss equity market has more to offer than this defensive trio. It is the companies we call 'little Nestles' that are characteristic of the Swiss universe. Investing in these Swiss market leaders, many of which are small- and mid-cap stocks, makes sense from both a return and risk perspective for both domestic and international investors."

If you look beyond the risks and rewards and consider the sustainability argument, you can see that Switzerland ranks highly in terms of environmental, social and governance (ESG). "There are no so-called 'sin industries' and also essentially no extraction of raw materials or fossil fuels. Adding Swiss companies to an international equity portfolio can therefore improve the carbon footprint and overall ESG rating", notes Frischknecht.

A closer look at the dividend yield also shows that you get a very high yield compared to the country's ten-year government bond, he said. Swiss equities could therefore be seen as a potential bond substitute for investors seeking a stable regular payout.

Swiss equities for a stable return

Invest in equities rather than bonds?

However, if an investor chooses to invest in equities rather than bonds, this is not a decision that should be taken lightly, as there is no certainty of return on the nominal value invested for equities, the Schroders expert points out.

"The first question we need to ask is: What fixed-income alternatives are there for those investing in Swiss francs?? A non-Swiss investor seeking investment in a stable hard currency country, as well as a domestic Swiss investor, could both consider German bonds as an alternative", says Frischknecht.

For the first time in many years, the spread between ten-year German and Swiss government bond yields has fallen to almost zero. So far, Swiss interest rates have almost always been lower – in line with economic theory. "Since there is nothing to gain from a yield perspective, why not consider Switzerland, which has a stronger currency history than the euro", asks the Head of Swiss Equities.

Swiss government bonds compared to German government bonds (ten-year maturity)

"Is the Swiss dividend yield also attractive enough from an absolute perspective", is the second question Frischknecht answers: "If we compare this with other important capital markets, only the UK has a significantly higher dividend yield. Dividend yields are also slightly higher in Spain and Italy than in Switzerland, which could reflect higher country risks and possibly a higher risk of future dividend cuts."

The third question concerns the sustainability of dividends. It should be noted, according to the expert, that Swiss companies on average have very solid balance sheets, making them more resilient to economic and financial crises and well positioned to not only maintain current dividends, but increase them over time.

The "little Nestles"

Finally, Frischknecht takes a look at the more immediate outlook and also the longer-term impact of the "little Nestles" mentioned above. These companies are leaders in fields as diverse as machinery, watches, jewelry, human resources, logistics, inspection, private banking, dental implants, hearing aids and computer equipment. They had to prove themselves outside the narrow Swiss end-user market by developing a real competitive advantage that cannot be quickly copied by their peers. "Superior products, technologies or services, as well as a high share of the relevant global market, allow these companies to generate healthy margins. Simply put, they can offer higher profits for longer", stresses the Head of Swiss Equities.

In his view, this shows why the Swiss market, and Swiss small- and mid-caps in particular, have outperformed global equities in the past. He also believes that this asset class is well positioned in the long term.

In the shorter term, Frischknecht says companies with a strong global position, associated with a high share of international revenues, have an advantage in the context of the current economic environment: in the most likely scenario for 2021, namely a global synchronized economic recovery, they should benefit from the revival of world trade.

"We see a number of advantages to a broad Swiss equity allocation or specific Swiss small- and mid-cap exposure: An investment in a hard currency with one of the highest dividend yields, especially compared to the yields of "risk-free" ten-year government bonds. This is also an investment in many world-leading companies that have historically outperformed global competitors and are well positioned for the future. The ESG profile of such an investment is also very advantageous internationally", Frischknecht summarizes his outlook.

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