Swiss Stocks May Be Boring but They Are Matching the S&P 500

(Bloomberg) --

A Swiss company may not be among the Stoxx Europe 600’s top 10 performers this year, but the country greatly contributed to the benchmark’s biggest gain in a decade. In terms of weight in the rally, Swiss stocks hold the top three spots with Nestle, Novartis and Roche, and the SMI Index is matching the S&P 500 when including dividends over the past two years. Given the defensive nature of this market, a number of strategists and fund managers see scope for more outperformance given the low growth environment.

For Eleanor Taylor Jolidon, a fund manager at Union Bancaire Privee in Geneva, Swiss stocks will remain attractive next year as investors seek high-quality shares in this low-growth environment, which is “extremely positive for the Swiss equity market,” she says.

Swiss Stocks May Be Boring but They Are Matching the S&P 500

The fund manager says the Swiss market offers the second-best cash-flow returns on investment after the U.S., but also companies with high-quality managers, sound strategies, strong brands, and a stable political backdrop. Swiss companies also offer “fairly decent visibility” in terms of earnings growth expectations, she adds.

Kepler Cheuvreux head of Swiss equities Torsten Sauter agrees and sees Switzerland as likely to continue outperforming other markets in 2020. With slow global growth and low inflation, it should remain attractive as investors look for dividend growth, he says.

“It’s a bit boring but this is why Swiss equities work: they were winners in the last couple of years and will likely continue to be winners for the next couple of years,” Sauter says. In terms of total returns, the SMI is the only benchmark in Europe rivaling with the S&P 500 over the past two years.

Swiss Stocks May Be Boring but They Are Matching the S&P 500

The SMI could be a “haven” among European indexes next year, Societe Generale strategists write in their year-ahead outlook, versus a more volatile DAX, biased toward exporters and cyclicals, an FTSE MIB dragged by weak Italian balance sheets and a FTSE 100 penalized by a rising pound. They see a turbulent year ahead for markets, with a mild U.S. recession kicking in during the second or the third quarter of 2020, which will affect European equities, even more so with expectations of a weakening dollar.

Losing the EU trading equivalence earlier this year wasn’t a big deal for Swiss equities. If there was any impact, it seems there was a volume transfer toward the Swiss exchange, as the SMI posted its highest quarterly volumes since 2011 between July and September this year. More generally, the trend has been very positive for Swiss stocks since 2014, in sharp contrast with the euro-area stocks.

Swiss Stocks May Be Boring but They Are Matching the S&P 500

Finally, there’s ESG. UBP’s Taylor Jolidon says the trend toward sustainability and Environmental, Social and Governance is structural and gaining traction. And the Swiss market is best positioned to benefit from that.

While stocks are increasingly being excluded from investment strategies if they come from industries perceived as “dirty,” Switzerland has no energy, mining, tobacco or gambling stocks, making it an ideal investment choice for anyone who doesn’t want to think too hard, she says.

Kepler Cheuvreux’s Sauter sees ESG-compliant stocks outperforming going forward, and lists Barry Callebaut, Belimo, Geberit, Sika, SIG Combibloc and Stadler Rail as shares likely to benefit.

As for the Swiss franc, it defies gravity at the moment. Taylor Jolidon would like to see it weaker, but realistically should some trade tensions persist, it won’t weaken, and may remain steady around current levels, she says, even during an election year in the U.S. “Parity seems to be where the Swiss franc and the dollar are comfortable,” she says.

©2019 Bloomberg L.P.

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