PERSPECTIVE3-5 min to read

Outlook 2023, Swiss equities

What role can Swiss equities play in a defensively-positioned portfolio?



Stefan Frischknecht
Head Swiss & European Equities

Ahead of a new year – and after the recent stock market recovery – it is fair to ask whether we can be more positive on equity markets. Have we just gone through a bear market in a bull market? Or are we in a longer bear market, with some interim bull phases?

We think it is the latter. We should not be fooled by recent improvements in economic data, which gave equities some cheer. While recent inflation readings have come down, they are still elevated and will require more central bank tightening. The yield curve in the United States has become inverted, which – if persistent – is generally a reliable forecast for a recession. In fact, most economists expect major Western economies to dip into recession: Europe at the beginning of 2023 and the US around mid-year.

From that point of view, it is too early to increase equity exposure. Stock markets typically bottom out during the early part of a recession when economic data is worst. The patient investor should therefore wait for a bigger buying opportunity. Although the current stock market recovery, which started in October, might last a bit longer (as markets are usually in a better mood at the end of the year, we would position investment portfolios a bit more defensively.

Defensive nature of Swiss equities

The Swiss stock market offers defensive characteristics. This holds true from a top-down perspective, given the heavy weight of healthcare and consumer staple sectors in Swiss indices. But we can also confirm it from a bottom-up view: we deem that around 13 of the 20 stocks in the Swiss Market Index in 2023 will be able to weather the storm well and deliver earnings per share which are approximately at, or above, those of the previous year.

We can even extend this and identify a similar proportion of companies in the 30-member mid cap gauge, the SMI Mid Index (SMIM) which should hold or increase the prior year level of earnings per share.

Obviously, there is no guarantee that every stock will deliver. We have seen enough profit warnings in 2022 to remain cautious regarding the ability of each company to pass on rising costs. However, from today’s perspective and looking at the drivers of business, this outlook would only be in danger in a sharp, deep recession. In a mild recessionary environment Swiss companies should broadly experience a degree of resilience.

It is not just the defensiveness that we like about Swiss companies. We also expect them to fare better over the long-term future thanks to their leadership positions and international geographic diversification.

Swiss quoted companies count a relatively large number of international market leaders among their number. The most prominent example is Nestlé, the world's largest food producer, which holds a leadership position in many sub-categories of the nutritional market.

There are also many success stories among small and medium sized quoted Swiss companies. They might be found in more typical Swiss sectors, such as watches (Swatch and Richement) or chocolate (Lindt & Sprüngli and Barry Callebaut). But they also exist in less predictable areas such as computer devices (Logitech), construction additives (Sika) or freight logistics (Kühne & Nagel), to just name a few.

Like Nestlé, these firms have usually only a small home market. They would not register the sales numbers they generate today if they had only concentrated on their domestic opportunity. This has two implications. Firstly, they need to be competitive to succeed internationally. Secondly, their revenues and profits are usually spread across many geographies. Both these aspects bode well for future profitability and resilience.

Since the beginning of 1987, Swiss stocks, as measured by the total return of the Swiss Performance Index (SPI) have delivered an annual performance of 7.52%, while international equities as measured by the MSCI World total return advanced 6.14%.

Accumulated over those years wealth invested in Swiss stocks rose to 13.5 times its initial value, compared to 7.5 times for an investment in global stocks.

606846 Outlook Swiss Equities_1222


Stefan Frischknecht
Head Swiss & European Equities


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