The disappointing performance of the Swiss equity market so far this year should not discourage institutional investors, analysts say. In fact, they maintain that Swiss equities retain a crucial role in European portfolios.
The Swiss equities market overall has been one of the worst performers in Europe so far this year. A number of factors account for this.
The launch of the euro at the beginning of the year led to the Swiss market being somewhat neglected as large investors moved to restructure in the light of the new benchmarks, according to Jochen Gutbrod, head of Swiss research at Lombard Odier in Geneva. At the same time, “peripheral Europe has been more interesting than core Europe,” he says, observing that investors have been focusing on countries such as Spain and Italy that are showing more exciting returns. The calming of the financial crisis in Asia has also had an effect on European investment, as US investors have been selling Europe to return to Asia.
Sector rotation has also had a dramatic impact in Switzerland, points out Peter Romanzina, head of Swiss equity market research for Credit Suisse First Boston in Zurich. The top-performing sectors this year, particular technology, consumer goods, telecoms and cyclicals, are those in which Switzerland is underweight, while poor performers, such as pharmaceuticals and insurance, are those in which the Swiss market is overweight.
The poor performance of a few heavyweights, such as Nestlé and Novartis, can have a radical effect on the market as a whole: for example, the pharmaceuticals giant Novartis represents around 20% of the market.
This short-term poor performance should not deter investors from taking a good look at Swiss investment opportunities, however. it is important to keep in mind that the Swiss market has been keeping pace with other European markets, says Michael Clark, an analyst with Robert Fleming Securities in London. In addition, the Swiss franc is closely correlated with the euro. As Romanzina argues, “Although politically Switzerland is not part of Europe, economically it is.”
According to Gutbrod, “The Swiss market will not continue to underperform, although the potential may be somewhat limited.” He predicts decent performance throughout May and June, although there is the possibility of a weak summer. In his view, the performance profile will depend somewhat on the progress of economic recovery throughout Europe.
Romanzina of CSFB concurs with this positive outlook. “Over time fundamentals will always shine through,” he maintained, and this is one area in which Swiss companies are strong. In addition, as liquidity becomes more important, Swiss companies, with their strong liquidity profiles, will be more attractive.
As the excitement that surrounded the launch of the euro calms, investors will begin to take a broader look at Europe, and Switzerland will again come into its own. Although Swiss companies will not be included in euro benchmarks, they do play a major role in other pan-European indices, points out Romanzina. For example, in the Dow Jones Stoxx 50, Switzerland ranks fourth in weighting, after the UK, Germany and the Netherlands.
The Swiss franc also offers a useful vehicle for currency diversification. As Romanzina puts it, “Where else do you go in Europe?” The Swiss franc also reserves its role as a possible safe-haven currency, according to Clark at Robert Fleming Securities. “If the euro continues its perceived decline, and there is a substantial loss of confidence, it may be that investors pour money into the Swiss franc,” although he also notes that, “it does not look as if that is happening.” The franc’s close correlation with the euro also weakens its safe-haven status to an extent. Stephanie Schwartz