The Swiss small- and mid-caps segment is as international as the wider market and so is set to benefit from sustained global growth dynamics in 2018.
Citywire AAA-rated Jolidon and A-rated Moeller noted that when it comes to final products and the countries where they are consumed, 35% of Swiss small- and mid-cap firms are ultimately dependent on emerging markets.
This includes Swiss automotive parts suppliers Sika, Georg Fischer and Komax, which sell their products up the supply chain to original equipment manufacturers in Germany.
Technology component companies such as VAT, Comet and AMS are also good examples of this trend, as is food ingredients firm Hochdorf.
‘High exposure to industrials, notably in added-value fields which tend to be more dynamic later in the cycle, is particularly attractive,' the duo said.
‘A number of supply products being sold in Europe tend to be consumed as final products in emerging markets. Improving consumer demand, particularly in China, is very supportive.’
Changing with the times
Adaptability is an impressive characteristic of Swiss small and mid caps, they said, which is particularly evident in the textile industry.
One good example of this adaptability is Oerlikon and Rieter, which moved from serving local customers to adapting their respective products for the competitive Chinese textile manufacturers.
‘They have maintained their leadership in their respective fields and adapted prices, products and operational models to survive, remain profitable or regain profitability and seek out new growth markets,’ the duo said.
Similarly, Straumann has adapted its range of products to address a growing price-sensitive customer base, without ‘cannibalising’ its own high-performance products, they explained.
Technology firm Comet developed new products and tapped into a new and growing market with its e-beam range, despite already dominating a vast share of the x-ray tube market globally.
‘This adaptability is made possible by the traditionally high level of R&D spending that crosses the whole of the Swiss market, regardless of a company’s size,’ Jolidon and Moeller said.
Another trait that makes Swiss small and mid caps particularly sought-after is the way in which they continuously search for ways to improve productivity.
In recent years, Ypsomed – a manufacturer of injection and infusion systems for self-medication – has directed a significant proportion of its capital expenditure to upgrading its production tools.
‘It is reducing costs by building in East Germany and increasing productivity through more automation,' the pair explained.
‘Similarly, some engineering companies have reorganised themselves to become more customer-centric in order to avoid developing obsolete products (DormaKaba and Bobst, for example).’
A look ahead
Going into 2018, the Swiss small- and mid-cap space is set to benefit from sustained global growth dynamics, the UBP duo said.
The largest sectors of the SPI Extra stand to benefit most from this global economic growth. For example, financials are expected to be supported by more activity, more loan growth and eventually by gradual interest rate hikes in various countries.
The SPI Extra has outperformed the broad index, the SPI, by 315% since 1996.
‘Over the past two years, the SPI Extra has regained its historical premium to large caps. Currently, small- and mid-cap stocks are trading at a 12-month forward P/E ratio above 22x, while the SPI is trading just above 17x.
‘The premium has been justified due to the long-term ability of Swiss small and mid caps to grow their earnings faster than their larger peers. Over 2017 and going into 2018, this is clearly the case.’
While valuation ratios are above historical levels and look extended, the multiple expansion of Swiss small and mid caps has been weaker that that seen in neighbouring European countries, they pointed out.
‘The Swiss small- and mid-cap space still has considerable room for improvement. EPS have not yet reached peak levels – potentially held back by the particularly severe currency headwinds, but also by the low level of investment since the financial crisis.’
Over three years to the end of October 2017, the UBAM (CH) Swiss Small and Mid Cap Equity fund has returned 60.5%, which compares with the benchmark SPI TR’s performance of 22.0% over the same period.