Corporate earnings in Switzerland look set to rise. UBS Analyst Stefan R. Meyer is optimistic as far as equities are concerned.
by Marc Lustenberger
17 Feb 2017
Inflation is returning to Switzerland – although still hovering at very low levels. What does this mean for private investors?
It means the chance of the very low interest rates normalizing – which should generally be seen as a good thing. After all, the financial institutions are under increasing pressure to pass on negative interest to their clients. However, we don’t expect the Swiss National Bank to turn its back on negative interest rates any time this year. In other words, there will still be pressure on account interest.
So, parking money in your savings account is an even worse option now than it was before?
As long as we had deflation, clients’ savings account assets didn’t lose any real value – because they were able to buy more for their money. However, rising inflation combined with no interest leads to a decline in value as money then loses its purchasing power. That’s why it makes sense to think about investment opportunities – such as acquiring equities or other investment instruments.
2016 was a rather disappointing year for equities. Will things get better now?
No, but we do expect to see an upward trend. We predict that corporate earnings in Switzerland will experience positive growth. This figure fell slightly over the last couple of years – a fact that was naturally reflected in equity prices. But because the political uncertainties remain, there will also be uncertainties on the market and prices will therefore fluctuate accordingly.
The new president, Donald Trump, wants to restrict free trade. Does that pose a threat to Swiss companies?
Yes. Because, as a small market, Switzerland is reliant on international trade. However, Donald Trump probably won’t be able to carry out all his threats. He has to get them through Congress, where he can expect some resistance. Many Swiss companies already have production facilities in the US and so are less likely to be affected by any barriers to trade Trump may introduce. The healthcare sector could come under pressure, along with the machine and watch industries.
Nevertheless, UBS assumes that share prices will rise this year. Why?
We expect the global economy to pick up. In recent years, Switzerland frequently had to contend with the strong Swiss franc and currency losses. That should no longer be the case in 2017, which should have a positive impact on earnings in Swiss francs. The margins in various industries, such as the luxury goods industry, came under a lot of pressure in the past few years. We expect to see a slight improvement here.
Do you have favorites among the Swiss equities?
Within Switzerland, we prefer what are termed ‘sustainable dividend payers’. By this we mean companies that generate sensible streams of dividend income over a period of many years. We are particularly looking for companies with above-average dividend growth. In recent years, defensive sectors such as consumer goods, healthcare and telecommunications, for example, were among the winners here. This year, it’s economically sensitive sectors such as industrials and non-basic consumer goods, for instance, that are well placed for an uptrend.
The real estate market is seeing vacancy rates rise while rents are falling in some places. What does this mean for investors?
On the investment side, it means that growth opportunities are restricted while the risks of investing in real estate become greater. Although returns remain stable, the potential to make price gains has disappeared. We recommend only making very selective investment here from now on.
Which investments would investors be well advised to avoid?
In the equity market, stocks with a very high valuation combined with low growth potential. Examples include selected companies from the industry and consumer sectors. Bonds with a negative yield on maturity – i.e. the redemption date – are also worth mentioning. They should be avoided. The majority of Swiss government bonds are affected.
What do you recommend to investors looking for a safe haven for their money in politically troubled times?
On the bond market, companies with an average to good credit quality. In the case of equities, it’s important not only to diversify well but also to focus on companies that promise steady and sustainable dividend growth.
The markets at a glance
Equities: The “growth” factor is back and the dividend yield is attractive. However, the valuation is high. We prefer quality dividend payers and medium-sized enterprises.
Bonds: We increasingly see the risk of negative overall yields. We prefer corporate bonds from the “A” and “BBB” segments.
Real estate: Valuations are high but the fundamental drivers are missing. We advise only buying selectively.
Currencies: From the point of view of the franc, we expect a relatively stable dollar and stronger euro later in the year.
Economy: The growth of the Swiss economy is stronger than that of the eurozone.
Stefan R. Meyer studied business administration at university and has worked as an equities analyst with UBS for over 25 years. Following two fairly long assignments in Asia, he is now based in Zurich, where he specializes in the analysis of Swiss equities.