Towards a return of the Swiss stock market?

The acceleration of profits and the stabilisation of the franc should support the Swiss market.

© Loris von Siebenthal

The Swiss stock market has underperformed its European and American counterparts over 1 year, 3 years and 5 years. Despite the quality of the companies that make up the Swiss SPI index, stock market performances in local currencies have been lower and several factors can explain this observation. First, the sector allocation and the defensive side of the Swiss market are largely responsible for this underperformance. Indeed, the SPI is composed of 53% defensive sectors compared to 29% in Europe and 35% in the United States. During periods of growth as was the case in the periods considered here, the weighting of these sectors weighed on relative performance. More specifically, it is the healthcare sector that has been most underperformed in relative performance, this being the main sector in Switzerland and representing 32% of the market compared to only 7% in Europe or 12% in the United States. Another marked difference explaining the underperformance is the large underweighting of information technologies, which represent only 2% of the Swiss market compared to 15% in Europe and 32% in the United States. The consequence of these sector biases is that the beta of the Swiss market is only 0.75 compared to a global index, while Europe has a beta of 1.05 and the United States 1.10.

Another angle of explanation is to break down the performance into 3 sources: dividend reinvestment, the evolution of the valuation multiple and the growth of profits. While the reinvestment of the dividend of Swiss companies contributed the most and represents almost half of the performance over 5 years, the valuation multiple only increased by 7%, which is approximately the same movement as in Europe but significantly lower than the growth observed of 29% in the United States. The most differentiating element is the growth of profits which was only 13% in Switzerland, compared to 35% in Europe and an impressive 62% in the United States (largely driven by the information technology sector).

5-year performance breakdown

Source: Bloomberg, BCGE Asset Management, data as of 31.05.2024

While profit growth in Switzerland appears disappointing at the index level, it does not fully reflect the performance of the companies that make it up for two reasons. First, it was negatively impacted by the rise of more than 21% in the franc over this period and therefore penalizes international activity reported in francs. Indeed, the companies making up the SPI index considered here make more than 92% of their sales abroad. In addition, the sector bias also played a role, with weak profit growth in the healthcare sector, both in absolute terms and relative to other regions.

We are nevertheless very positive on Swiss equities for the coming months, which is reflected in a large overweighting in our management mandates (16% versus 2% in our benchmark). This optimism is based first of all on the intrinsic qualities of Swiss companies. Indeed, the latter very often have a leading position in their respective markets, which is reflected in a very high level of gross margin (47%, or 10 percentage points higher than in Europe and a similar level in the United States). This allows companies to invest much more in research and development (7% of sales in Switzerland versus 4.5% in Europe and 8% in the United States), which is a structural source of market share gains and therefore growth. This investment in R&D is at the heart of the DNA of Swiss companies and is also explained by the appreciation of the franc, creating a cost disadvantage and pushing them to differentiate themselves through quality and innovation. Finally, Swiss companies have significantly lower debt, illustrated by a ratio of only 0.8x net debt/EBITDA compared to 1.3x in Europe (0.7x in the United States).

In addition to these structural aspects, the short-term dynamics are also favourable to Swiss equities in our opinion, with in particular a stabilisation of the franc (-5% since the beginning of the year) but above all thanks to a profit dynamic that should accelerate during the second half of 2024 as well as in 2025 and which should be significantly higher than in Europe and similar to the United States. The positive momentum of profits, coupled with a reasonable relative valuation, make us optimistic today about the performance prospects of the Swiss equity market.

Profit growth expected

Source: I/B/E/S, BCGE Asset Management

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