The Swiss equity market: not to be ignored
Swiss-quoted companies are an important part of the European equity universe, accounting for 15% of the Stoxx Europe 600’s market capitalisation and cannot be ignored.
Not the least of the Swiss market’s appeal currently is its defensive tilt. Defensive sectors (food & beverage, healthcare, personal goods, retail and utilities) account for over 70% of the Swiss Market Index’s market capitalisation. Superficially, the Swiss market looks to be expensive relative to the rest of Europe. The 12-month forward price-earnings ratio for the Swiss Performance Index (SPI) currently stands at 15.5x, closer to the S&P 500 (17.9x) than the Stoxx Europe 600 (11.8x). Yet, defensive sectors are trading at similar multiples on the SPI and the Euro Stoxx. On a sector-adjusted basis, the Swiss equity market is similarly priced to broad European indices. In addition, Swiss-quoted companies are highly international, deriving 30% of their sales from the US and only 6% from Switzerland itself.
So far this year, most equity indexes in developed markets have posted negative returns in local-currency terms. Swiss equities are no exception (although the strength of the Swiss franc has considerably eased the pain for euro area investors). Current consensus expectations are for earnings per share on the SPI to decrease by 4.5% in 2022, mainly due to the financial sector (with a similar negative trend expected on the Stoxx Europe 600 and S&P 500). But consensus sees 2023 earnings on the SPI rebounding by 13.5% thanks to a positive base effect for financials and a rise in the earnings growth of defensive sectors.
In a nutshell, weak earnings momentum in Swiss equities this year should not cause undue concern to longer-term investors. The Swiss equity market carries a similar valuation to broader European indexes on a sector-adjusted basis. The defensive nature of Swiss equities is one of their appealing feature during times of market uncertainty such as today. This explains while we are underweight euro area and US equities, but neutral their Swiss peers.