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The secret of the Swiss equity market

Beyond beautiful landscapes and various flavourful cheese and chocolates, Switzerland is also known to financial market professionals for its investment opportunities. For decades now, many have chosen the Swiss stock market as a safe way to build long-term wealth and safeguard their portfolios in uncertain times.

There are numerous reasons for choosing Switzerland. Its neutrality, reliable market economy, defensive sectorial bias, and quality-asset companies put the country among the strongest economies.

Quality & competitive stocks

The Swiss stock market offers multiple interesting single names with exposure to different sectors. While cherry-picking attractive companies could be exciting, investing in a basket of stocks (called ETF) is safer. The Swiss Performance Index (SPI), one of the three Swiss stock indices, has proven to withstand different macro environments thanks to its defensive posture and blue-chip companies. The world knows that companies like Nestle, Roche, and Novartis are likely to weather challenging market conditions well, and those are three of the major companies in the index. See the chart below for the top 10 companies in the SPI; you’ll probably recognize most names.

tabl spi

Besides being less volatile, Swiss indices do also have a superior return profile. Since early 2000, all Swiss market indices have greatly outperformed major peers, in particular the S&P500, the US benchmark stock market index known for its competitiveness. A buy-and-hold investment in the SPI since January 2000 would have yielded a total return of 390%, while a similar investment in the S&P500 would have resulted in 310%, which is 80% less. A basket of European companies (Stoxx50) would have yielded only 57%, a significant underperformance.

spi vs

The macro-environment calls for defensive assets

The macro backdrop is starting to become cloudy as high inflation in the US and other regions haven’t shown signs of a peak yet, squeezing consumers buying power. Recent US GDP data showed consumer spending is barely holding while growth in investments is down to zero. Moreover, the war in Ukraine which has introduced considerable imbalance in grain and energy markets, plus strict Covid-19 policies in China further challenge consumers and businesses alike. The word “recession” is lingering in the minds of many experts and economists.

The advantage of investing in Swiss indices is that you can get a bit from every world. More than 50% of Swiss indices components are companies that provide essential everyday consumer products (food & pharma), demand for which tends to be stable regardless of the state of the economy. Therefore, even when growth disappoints, which negatively affects stock prices of demand-sensitive companies, history shows Swiss indices tend to do relatively well.

The chart below shows US ISM manufacturing (a proxy for growth) and a ratio of German’s Dax to Switzerland’s SPI index. One can note that during periods of low growth (declining ISM), the SPI continuously performs better than its German counterpart.

gro spi

Although growth has been decelerating since mid-2021, current economic leading indicators point to a further slowdown. In Europe, inflation and a reduction in Russian gas flows are pushing the economy into a mild recession over the winter. Similarly, in the US, sticky inflation has prompted the Federal Reserve to raise rates considerably – 225 basis points in over a year now. While Fed’s actions have slowed down the economy, the US jobs market is still very strong, and inflation is currently near 9%. This implies more rate hikes are on the table. In this environment, investors should consider defensive value sectors like health care and consumer staples.

Swiss stocks are a must!

The macro-environment looks uncertain, and companies worldwide are complaining about rising costs. If you’re looking to diversify your portfolio and protect your assets during this time of economic uncertainty, the Swiss market could be your answer. Its large defensive companies with solid balance sheets and lower correlation to the broader market could offer a better investment opportunity.

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