Swiss stocks have proven to be more resilient during the recent market rout. The SMI index has outperformed its counterpart Stoxx50 by more than 7% this year. What is driving the difference?
A wall of worry is rising with Federal Reserve rate hikes, the war in Ukraine, and China’s strict lockdown measures, all increasing the risks of a slowdown in global growth. So far this year, cyclical stocks, the most sensitive segment to economic cycles, are taking a hit, underperforming their defensive counterparts as investors reduce their exposure to risk.
The Swiss Market is simple to understand
For decades now, many have chosen the Swiss stock market as a safe way to hedge against volatility. There are numerous reasons: Switzerland’s neutrality, a reliable market economy, a defensive sectorial bias, and quality-asset companies are a few to mention that render the Swiss stock market attractive during times of uncertainty.
With meticulously calculated industrial splits and blue-chip companies, the Swiss Market Index (SMI) is sturdy. 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 SMI; you’ll probably recognize most names.
From January to March of 2020, when Covid-19 swept the globe and rocked the markets everywhere; Swiss markets were also impacted but less than most. Both the EU and the US, key economic partners for Switzerland, fell sharply during this time. However, due to the focus on quality and niche products, the Swiss markets remained steady.
What about today?
The macro backdrop is starting to become cloudy as accelerating inflation in the US and other regions hasn’t shown signs of a peak yet, squeezing consumers buying power. In addition, as supply chain shortages and Covid-19 policies in certain regions continue to challenge consumers and businesses alike, the word “recession” is lingering on the minds, and the appeal for Swiss stocks is reemerging.
In fact, as seen in the chart below, during periods of low growth, the SMI continuously performs better than its German counterparts.
During times of economic turbulence, investors tend to move their holdings from cyclical assets to more defensive assets. Health care and consumer staples are less likely to move in unison with business cycles, and are necessary at all times, making them great investments.
So far so good
Switzerland’s proximity to the war in Ukraine has the potential to shake markets, but so far, the Swiss market has proven to be resilient.
Comparing the Swiss Market Index (SMI) to the S&P500 (SPY) year-to-date, it is clear that the SMI has had dips, but is outperforming by 2% the SPY. Essentially, when the market is doing well, the SMI will follow suit and climb, but when the global markets become volatile, the SMI holds firm due to its defensive characteristics, mitigating losses in portfolios.
Competitive companies in strong stable industries is what leads the Swiss market to the state it is notorious for. The 20 companies represented in the SMI have plenty of cash on hand and strong balance sheets, something that allows them to weather unpredictable events.
Moreover, the SMI has always offered a better dividend yield than the S&P500, and healthy dividends are a great source of income for some investors. At times, analysts think the SMI is overvalued because it is often used as a strategic hedge, but unlike the 2012-2020 period when SMI was trading at a premium compared to the S&P500, the market dynamics have been reversed since 2020.
The chart below shows that the SMI is currently trading at a price-to-earnings ratio of 17, the lowest since 2012, despite yielding a higher dividend. If history is any guide, the upside for the SMI is more attractive than for its American counterpart.
The reputation of the Swiss stock market as a safe, stable investment opportunity is no secret. During times of economic uncertainty or recession around the world, investors are known for moving their investments to the Swiss stock market as a hedge, attempting to protect portfolios. While this is one of the upsides of investing in Switzerland, if enough people adjust their portfolios and push more money into the market at once, the Swiss Franc could become further overvalued, causing a currency risk to the investors.
Swiss Investments are Simple
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 market are expected to perform well. Though investors face some currency risk, the index’s currently attractive valuation potentially offers interesting upside potential.