Perspektiven

Outlook 2021: Swiss equities


Swiss equities performed well in 2020, with defensive heavyweights Nestlé, Novartis and Roche substantially outperforming during the Covid-19-related correction. However, at the end of November 2020, these stocks were not standing out compared to the Swiss Performance Index (SPI) or the MSCI Europe. Rather, it is thanks to the many leading companies outside the blue chip Swiss Market Index (SMI) that the overall Swiss market fared relatively well. The small and mid cap index, the SPI EXTRA Total Return (SPIEX), almost kept up with the performance of one of the strongest markets to date in 2020, the S&P 500 (SPX).1

While it is possible, as many strategists are forecasting, that the more cyclical European markets might play ‘catch-up’ in 2021, we remain positive on the Swiss stock market for two reasons. Firstly, the three heavyweight defensive stocks continue to provide upside to investors. Their businesses are making good progress and they offer attractive and growing dividends of more than 3%, on average.2 Secondly, because the Swiss equity market has more to offer than this defensive trio. It is what we call the ‘small Nestlés’ that are characteristic of the Swiss universe. Investing into those Swiss leaders, many of which are small and mid-cap stocks, makes sense from a return and risk perspective for both domestic and international investors.

Going beyond risk and return, looking at the sustainability argument, we note that Switzerland ranks high in terms of Environmental, Social and Governance (ESG). There are no so-called ‘sin industries’ and there is no material basic resource or fossil fuel extraction. Adding Swiss companies to an international equity portfolio can therefore improve the CO2 footprint and the overall ESG rating.

A closer examination of the dividend yield also reveals that you get a very high yield pick-up compared to the country’s 10-year government bond. Therefore, Swiss equities could be regarded as a potential substitute to fixed income sources for those seeking a stable regular pay-out.

Swiss equities for stable yield?

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Source: Bloomberg, 30 November 2020

However, if an investor decides to invest in equities rather than bonds, this is not a decision that should be taken lightly, as for equities there is no secure payback of the nominal invested.

The first question we have to ask is: what fixed income alternatives are available to those who invest in Swiss francs? A non-Swiss investor seeking an investment in a stable hard currency country as well as a domestic Swiss investor could both consider German bonds as an alternative. For the first time in many years, the difference between German and Swiss 10-year government bond yields has shrunk to almost zero. Previously, Swiss interest rates were almost always lower - in line with economic theory. As nothing is to be gained from a yield perspective, why not consider Switzerland which has a stronger currency history than the euro?

Swiss vs German 10-Year yield

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Source: Bloomberg, 30 November 20203

Second, we should ask “Is the Swiss dividend yield also attractive enough from an absolute point of view?” If we compare this to other major capital markets, only the UK has a notably higher dividend yield. The dividend yield is also slightly higher in Spain and Italy than in Switzerland, which might reflect the greater country risks and, potentially, a higher risk of future dividend cuts.

The third question is about the sustainability of dividends. It should be highlighted that Swiss companies have very solid balance sheets on average, which makes them more resilient against economic and financial crises and well-placed not only to maintain current dividends, but to grow them over time.

Finally, we take a look at the more immediate outlook and also at the longer term implications of the ‘small Nestlé’s’ mentioned. These companies are leaders in areas as diverse as machinery, watches, jewellery, staffing, logistics, inspection, private banking, dental implants, hearing aids and computer equipment. These businesses have had to prove themselves outside the narrow Swiss end-consumer market by developing a genuine competitive advantage, something that cannot be quickly copied by their peers. Having superior products, technology or a service, together with a high share of the relevant global market, allows these companies to generate healthy margins. In simple terms, they are able to offer better profits for longer.

We believe this highlights why the Swiss market, and Swiss small and mid caps in particular, have outperformed global equities in the past. We also think this asset class is well-placed for the long-term.

Also, on a more short–term basis, in the context of the current economic environment, companies with a strong global position that goes hand in hand with a high share of international revenues have an advantage: in the most likely scenario for 2021 of a global synchronised economic recovery, they should benefit from the resurgence of global trade.

In summary, with a broad Swiss equity allocation, or a specific Swiss small and mid cap exposure, we believe that there are a number of benefits to be gained: an investment into a hard currency with one of the highest dividend yields, particularly if compared to the ‘risk-free’ 10-year government bond yields. It also represents an investment in many global leaders that have outperformed global peers in the past and are well placed to do so in the future. The ESG profile of such an investment ranks very favourably in international terms too.

1. Total returns as of November 30, 2020: SPIEX: 4.82%, S&P 500: 6.86%, SPI: 1.29%, MSCI Europe -5.26%, Nestlé: -0.93%, Roche: -1.98%, Novartis: -7.22%, all in CHF terms.

2. Estimated dividend yield Nestlé: 2.66%, Roche: 3.00%, Novartis 3.61%, source Bloomberg, Dec 1, 2020

3. As of November 30, 2020, the yield on 10 years Swiss bonds was -0.55% and -0.57% on the equivalent German government bond

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Marc Brodard

Marc Brodard

Head Private Clients - Switzerland
Telephone:
marc.brodard@schroders.com