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Defensive and Cyclical Swiss Equities Prove to Be Good Investments

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That Switzerland’s equity market has been a strong performer this summer should come as no surprise. Geopolitical tensions across the world are high, and as investors continue to seek safer havens, both Swiss equities and the Swiss franc have benefited and will continue to do so as global uncertainty prevails.

However, for investors like Stefan Frischknecht, portfolio manager for Swiss equities at Schroders in Zurich, there’s an equally solid case to be made for the asset class even when there are no major crises in the world.

The Swiss market is dominated by defensive industries and “heavyweight” names, like food giant Nestle, and drug manufacturers such as Novartis and Roche, Frischknecht said, and this is what makes it particularly attractive to investors in times of global uncertainty. Beyond that, however, Switzerland has several other positive attributes, not least the fact that “in terms of total market capitalization, we’re the eighth largest market in the world,” Frischknecht said. “And a protracted time horizon is what should matter for equity investors. If they are investing because they want to reap higher returns in stocks compared to other asset classes, and for the long-run.”

Although most investors tend to think of Switzerland only in terms of heavyweights like Nestle, “we have many other smaller Nestles, so the speak, on the Swiss stock market,” Frischknecht said.   

Because they’re domiciled in Switzerland, these and other companies (Frischknecht would add multinationals such as Procter & Gamble, Tyco and Garmin to the list) benefit from all the positive attributes the country has to offer and that for decades, have attracted investment into Switzerland: A stable political system, low taxes, clear cut labor laws and a highly skilled workforce.

But beyond that, “Swiss companies are extremely international, and have established subsidiaries abroad,” he said. This gives them “a much better diversification of the geographical sources of income, as in they’re not dependent on a single country that today is booming, tomorrow is in crisis. And the more global a company is, the more it is exposed to global trade, which has grown approximately 2% above global GDP since the early 1960s.”

By definition, Switzerland’s SMI Index is a beta index, and therefore a true safe haven, said Dale Winner, co-manager of the Wells Fargo Advantage International Equity Fund.

The Swiss market is up 2% this year and “safe” stocks such as Novartis and Zurich Insurance are respectively up 12% and 11% year-to-date, he said. “Given all the turmoil, these companies look attractive to many investors and have performed well, and we, too, have benefited from their performance as well, since they were core holdings for us,” he said.

However, Winner, who describes himself as a “non-consensus” investor, actually favors Swiss companies that are not in defensive sectors, believing they have great long-term potential.

“We’ve been seeing tough headlines everyday—Ukraine, Israel/Gaza and now Iraq—but without minimizing the gravity of these situations, we believe that geopolitical events tend to have short-term impacts on the markets,” he said.

While many investors are heading toward defensive stocks because of geopolitical tensions and other issues such as the low growth rates in the Eurozone, which is raising the possibility of deflation, “we would disagree with that approach and actually we are active in cyclicals, which everyone else is selling,” Winner said. He cites Swiss automation and power technology company ABB as an example of that approach.

“ABB’s stock is down 10% because it’s regarded as a cyclical company, but we think it has an 80% upside in the next five years on normalized earnings, because ABB is a really high quality company and a leader in the automation business,” Winner said.  

“Everywhere around the world, companies are trying to improve automation, so that’s a long-term driver for us. ABB’s power products are also a strong driver for business, particularly in emerging market countries, so while a company like Novartis may not be cyclical and therefore a good investment for many right now, we are more interested in companies like ABB.”

According to Frischknecht, 80% of the companies in Switzerland’s large cap SMI index rank among the top 10 in global competitiveness and 70% rank first or second in terms of overall sales revenue or revenue from a particular unit.

“And what is true for our large caps is also true for small and mid caps: the proportion of leaders in their global niche is high for Swiss small- and medium-sized enterprises as well,” he said. 


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