Resilient - but not immune

The Swiss economy has held up relatively well in the global economic environment, given the weakness in the eurozone and especially in Germany, Switzerland’s second largest export market after the US. Germany has long been Switzerland’s most important trading partner, but its importance for Swiss goods exports has declined in recent years. The resilience of the Swiss economy stems from its less energy-intensive, less interest-sensitive, and less cyclical industries, in particular the pharmaceutical sector, but also the watch industry. At the same time, comparatively moderate increases in Swiss producer prices have kept Swiss products competitive, especially compared to their European competitors.

In the first half of 2024, the Swiss economy grew at above-average rates by historical standards, mainly thanks to a strong second quarter driven by strong exports. As expected, real gross domestic product growth slowed to below-average rates in the third quarter. Declining exports and equipment investment weighed on growth, reflecting a weaker manufacturing sector. Private consumption, on the other hand, improved and made a positive contribution. 

Looking ahead, we have lowered our growth forecast for the Swiss economy to 1.4% in 2024 and 1.3% in 2025. For this year, the revisions are mainly due to technical factors, as the State Secretariat for Economic Affairs revised down its estimated growth rates for the first and second quarters of this year. For 2025, the weaker growth outlook for the Swiss economy is mainly due to our earlier downward revision to a weaker economic outlook for the eurozone, which we expect to have a negative impact on Switzerland’s external demand. The lack of recovery in the eurozone clouds the outlook for Switzerland and we now expect the Swiss economy to slow in 2025.

Swiss equities: Defensive in nature 

We have downgraded our rating on Swiss equities from Overweight to Neutral, reflecting a more pro-cyclical strategy. The Swiss Market Index (SMI), dominated by defensive sectors, such as healthcare and consumer goods, offers less potential for outperformance and higher company-specific risks. Nevertheless, Swiss mid-caps remain our favourite thanks to their strong balance sheets and historically high earnings growth.

In line with our updated strategic direction, which emphasizes a more pro-cyclical approach, we have adjusted our rating on Swiss equities from Overweight to Neutral. It is important to note that the SMI tends to exhibit greater defensive characteristics than many other indices. Approximately two-thirds of the SMI’s composition is made up of defensive sectors, including healthcare and consumer defensives, which is significantly higher than the 40% found in other developed market equities. Most notably, the three leading components of the SMI (Nestlé, Novartis and Roche) account for 45% of its total weight, which has a significant impact on the performance of the index relative to company-specific risks.

Despite maintaining a favourable view on Swiss equities due to their distinctive attributes and potential role within a diversified global equity portfolio, we expect limited outperformance opportunities for these assets in 2025. This expectation is based on a generally brighter outlook for global economic growth and higher interest rates at longer maturities.

We continue to prefer Swiss mid-caps 

Historically, Swiss large-cap equities have outperformed during periods of slowing economic expansion and declining long-term bond yields. Within the Swiss equity market, we continue to favour mid-cap stocks, which typically offer a higher degree of cyclical exposure. Swiss mid-caps often have robust balance sheet profiles and they have outperformed their European and US counterparts in terms of earnings growth over the past decade. Their consistent outperformance has positioned them favourably against broader global equities and even Swiss large-caps over the long term.

Switzerland’s ability to innovate creates an environment conducive to the development and growth of quality companies, thereby providing investors with substantial and sustainable returns. Against this backdrop, active management and selective investing may become increasingly attractive strategies for achieving investment objectives.

What does this mean for investors?

The Swiss economy has proved relatively resilient to the weakness in the eurozone. Nevertheless, the lack of recovery in the eurozone clouds the outlook for Switzerland. We expect the Swiss economic growth to slow next year. Against this backdrop, active management and selective investing may become increasingly attractive strategies for achieving investment objectives.

For Swiss equities, Swiss mid-caps remain our favourite thanks to their strong balance sheets and historically high earnings growth. However, despite maintaining a favourable view on Swiss equities due to their distinctive attributes and potential role within a diversified global equity portfolio, we expect limited outperformance opportunities for these assets in 2025.