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Lombard Odier PB CIO: Is Swiss small-cap surge sustainable?

Lombard Odier PB CIO: Is Swiss small-cap surge sustainable?

While the Swiss stock market is trading at high levels in the short term, there are pockets of opportunity in the small- and mid-cap space, says Stéphane Monier, CIO at Lombard Odier Private Bank.

Monier expects more potential from the small- and mid-cap segment of the Swiss market, which is likely to benefit from the solid fundamentals supporting the global economic upturn.

Swiss small and mid caps have outperformed large caps by more than 11.8% year-to-date, thanks to strong earnings growth – a trend that has been seen across European markets. It's something that has also picked up in the US recently, he said.

‘Compared with the expected return on other asset classes, the return on equities is appealing.’

The dividend yield in Switzerland is 3.2% for the SMI, 2.9% for the SPI and 2.1% for the SPI Extra – all attractive levels in the current environment of low returns on financial assets, he said.

‘In the current macroeconomic environment, and based on the global economic outlook, it would therefore seem that the equity markets are not overheating, but have achieved a cruising speed in sync with global growth.’

Making up the backbone of the Swiss economy, listed small and medium enterprises are typically export firms.

With this, external market growth sets the pace for the earnings outlook of these companies, he explained.

‘They have good reason to be optimistic. For the first time since the financial crisis in 2008, the global economies have engaged this year on a path of a synchronised and stable recovery. Balanced growth, subdued inflation and an affordable cost of capital are the hallmarks of this “soft goldilocks” economic environment.’

When looking at sectors, companies in construction materials are dependent upon the eurozone’s economic recovery and a positive relationship with China, while firms in the automotive industry continue to benefit from growth in Europe.

In terms of the oil and gas industry, firms may appear cautious but their order books are stabilising, Monier said.

Even so, the CIO admitted that Switzerland’s growth rate is lower than that of the eurozone and the US at present, which means that economic players cannot afford to shy away from making crucial investments, as savings excesses could stifle domestic growth, he said.

Noting the advantages that Switzerland boasts, Monier said: ‘Switzerland nurtures companies with global reach and has historically produced leaders in numerous industries, while its innovation has stimulated economic growth. Growth supported by advances in technology – i.e. structural forces rather than cyclical factors – is particularly desirable, as it is by nature defensive. It tends to protect corporate earnings when the economy enters a cyclical downturn.

‘The small- and mid-cap segment is well placed on this path of structural transformation: the technology sector now represents 11% of the SPI Extra, and the industrial sector 26%.’

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