Swiss equities offer excellent opportunities for investors seeking high quality at low risk. But it's important to know what to look for.
In an often turbulent world Switzerland has historically been an island of stability, and this remains the case today.
No surprise then that Swiss equities are in great demand among domestic and international investors attracted by the country's quality companies and relatively low risk environment.
But while Switzerland offers many advantages to businesses, not every enterprise “made in Switzerland” is run like clockwork. To find those Swiss equities that are both solid and have a high return potential, you need to know what to look for.
Strength across the board
From its highly trained workforce and excellent infrastructure to its low corporate taxes and business-friendly regulatory environment, Switzerland has earned its status as one of the world's most competitive countries.
Investors looking to benefit from this environment should seek out those companies best placed to profit from these advantages as well as to gain market share and increase margins. The good news is that Swiss companies have a lot of experience doing just that – even under the most challenging circumstances.
Take the strong Swiss franc. When the Swiss National Bank dropped the peg to the euro in January 2015, sending the franc soaring, many feared for Swiss competitiveness.
These fears have proven overblown. Through increases in efficiencies, stringent cost control, relentless innovation and intelligent use of outsourcing, Swiss companies have been remarkably resilient. As in the past, they have also been bolstered by a highly diversified global revenue stream (only 10% of the revenue for Swiss equities comes from the domestic market).
Doing your homework
That said, not all that glitters in Switzerland is gold. To avoid being disappointed, investors need to do their homework.
What does that entail?
First and foremost, we think investors should look for innovators. Good indicators include size of RnD budgets or collaborations with academia.
While Swiss companies are known for paying dividends – a big draw for yield-minded equity investors – we prefer a good balance between dividends and reinvestment to ensure the sustainability of the business and hence returns.
Investors should keep an eye on the Swiss M&A market too. Corporate buyers have been willing to pay premium prices for Swiss quality, and the Swiss have been active buyers themselves (according to the latest Eurostat figures, Switzerland is the biggest investor in the Eurozone).
These of course are only a few of the nuances of the Swiss market that equity investors should master. We think the effort is worth it. While there are risks, as has historically been the case, the country offers many rewards.