If you had to invest 10,000 francs for ten years today, where would you put it?
Definitely in an equity fund on the Swiss SMIM equity index. It comprises the 30 largest mid caps – i.e. medium-sized Swiss companies – that are not already included in the blue chip SMI index.
Why would you invest in medium-sized Swiss firms?
Swiss mid caps have been impressing investors with some very solid balance sheets, and they are also enjoying above-average organic growth. What is more, they are almost as regionally diversified as the big corporations on the SMI. Although you currently pay a premium of 10 percent for mid caps on the SMIM, historically this has been higher, at 12 percent.
Will this tip still apply in a month’s time?
Of course. The timing of long-term investments is relatively insignificant. What counts is that the growth potential of mid caps is more attractive than average.
Prices on the Swiss stock market slumped at the start of the year. Are there now opportunities to buy?
The opportunities seem to be intact, as we expect to see a slight rise in corporate profits for the first time in two years. And for the first time since 2012, even currencies might make a positive contribution to profits. The shock of the sudden appreciation in the Swiss franc primarily hit corporate profits in 2015. Although the strong franc is still making life hard for exporters, things are looking up somewhat from an accounting perspective.
Which trends can investors count on at present?
On the one hand on stocks in companies which consistently pay out high dividends. These include, for example, Zurich Insurance, the pharmaceutical firms Novartis and Roche, the certification company SGS, and Cembra Money Bank, which has been listed on the SIX Swiss Exchange for nearly three years. On the other hand, cyclical niche markets are also attractive, if you approach them tactically. The textile market, for example, was on a downward trend for two years, but now it is recovering. This is benefiting such companies as the textile machinery manufacturer Rieter. The European construction market is also picking up after a difficult period. You can participate in this with Forbo, the global leader in linoleum flooring. Forbo has a very solid balance sheet and strong profit margins.
Can one also find attractive bonds?
Given that interest rates remain historically low, the potential is limited. That said, bonds also went through a correction phase at the start of 2016, with bonds issued by banks coming under pressure, for example. Preference should be given to bonds from the more stable investment banks such as Swiss-franc bonds from Goldman Sachs or the Australian bank Macquarie.
Swiss real estate stocks and funds made a spectacular start to 2016. Are they overvalued?
No, I wouldn’t say so. The valuation of real estate stocks and especially funds is high. Their upward price potential is limited. However, these investments offer long-term security because they are backed up by real, tangible assets. This justifies a certain premium in turbulent times. What is more, real estate investments offer better returns than bonds. We don’t anticipate a significant slump in the real estate market.
Stefan R. Meyer has been working in research at UBS for over 20 years. He is responsible for analyzing the Swiss equity market and is editor-in-chief of the monthly investment report Investing in Switzerland.
Investing in Switzerland – at a glance
Investing in Switzerland – at a glance
Equities: Corporate profits are likely to rise again for the first time in two years.
Bonds: Preference should be given to corporate bonds.
Real estate: Upward price potential seems limited.
Currencies: The franc could fall slightly against the euro and the US dollar in the medium term.
Economics: Switzerland has weathered the sudden appreciation in the franc surprisingly well, but the global economic slowdown is hampering exports.