As global investors face evolving geopolitical and market landscapes, the Swiss equity market presents a compelling case for global portfolio diversification in 2025 and beyond.
Underpinned by a stable political and economic environment, structurally low unemployment and inflation, a healthy gross public debt, low and stable corporate taxes, and a high spend on research & development (R&D), the Swiss equity market has historically outperformed its global counterparts. Despite recent challenges, including currency fluctuations and limited tech exposure, several catalysts suggest a recovery potential for 2025 onwards, supported by attractive valuations and growth potential.
Switzerland’s traditionally supportive business environment, which nurtures innovation, has seen its companies consistently perform well on global innovation indices. At the same time, a strengthening currency alongside some sector-specific downturns has exerted a moderating influence on the performance of Swiss equities. Additionally, the Swiss Performance Index (SPI) has maintained a more measured exposure than others to the tech sector, which may account for returns that differ from those seen in more tech-centric markets such as the S&P 500. Nonetheless, several emerging catalysts might pave the way for a recovery, suggesting a cautiously optimistic outlook.
Swiss equities have historically traded at a premium to global equities, reflecting Swiss companies’ higher and more stable value-creation profiles as measured by their Cash Flow Returns On Investment (CFROI, Source: UBS HOLT) over their Cost of Capital (CoC). After 2024's multiple-compression headwind, Swiss equities could see expansion in 2025, while other markets remain at fair value. Additionally, robust EPS growth of 11% (versus 12% globally) could support performance across Swiss segments.
With more than 85% of revenues generated outside Switzerland, the Swiss economy is export-driven. This means Swiss companies have been forced to deal with its appreciating currency over the long term, compensating for it with productivity and innovation. In addition, likely further interest rate cuts by the Swiss National Bank aimed at stabilising the Swiss franc should reduce the impact of currency fluctuations and maintain the competitiveness of Swiss products globally.
Swiss companies' export orientation secures them geographically diversified revenue streams, as they access growth outside their home market. As regards its exposure to the US, Switzerland ranks as the seventh-largest foreign direct investor in the US, which underscores its significant economic influence and robust bilateral ties. Also, Swiss companies bolster local employment, with about 500 firms supporting roughly 500,000 jobs nationwide. This integration enhances the stability of Swiss equities and buffers them against potential trade barriers, reinforcing their resilience in the face of geopolitical dynamics. In particular, high-value-added exports such as pharmaceuticals and medical equipment should be insulated from tariffs, with costs likely passed to US consumers.
Historically, Swiss equities have shown low correlation with major markets during corrections, sector rotations, and more recently, during tech-driven rallies. Their indirect exposure to large-cap tech via precision industries and advanced manufacturing positions them to benefit from broader EPS growth beyond the 'Magnificent Seven' and US tech stocks. Combined with limited direct IT exposure and a defensive tilt, these factors reinforce Swiss equities as a stabilising force in global portfolios. Small and mid-cap companies represent a compelling segment of the Swiss market, driven by robust fundamentals and pricing power afforded by their leadership in these niche industries of high-value-added products and services.
To truly capture such equities’ potential for returns, active management proves itself beneficial in navigating this diverse landscape, with attention paid not only to the financials but also to the qualitative aspects of each company, such as management expertise, alignment of incentives, forward-looking R&D plans, suppliers’ relationship-management, and talent-pool-harvesting capabilities. When applied judiciously, it could enhance the capture of inherent opportunities for value creation and capital gains.
Swiss equities’ strength stemming from strategic niche market positions, ongoing innovation, and diversified revenue streams could offer a portfolio both stability and growth potential in a challenging geopolitical and economic environment.
The views and opinions expressed by partner managers may differ from the house view. They are shared for informational purposes and do not constitute investment advice or a recommendation.
