Even before José Manuel Durão Barroso, President of the European Commission, announced in his state of the union address this September that “recovery is within sight”, foresighted investment advisors have increased exposure to equities in European markets. The second quarter of this year has seen overall European Union (EU) gross domestic product (GDP) growth turn positive, although Switzerland has been ahead of the rest of the region for some time now.
“Industrial output is increasing. Market trust is returning. Stock markets are performing well. The business outlook is steadily improving. Consumer confidence is sharply rising,” said Durão Barroso in his address.
After the overwhelming pessimism about Europe’s economies, investment advisors have banked on the opportunity presented by signs of growth in the Eurozone. The GDP of the European Union is set to grow by 1.4 per cent in 2014, showing signs of recovery.
“All indications are that Europe will follow the US into normalisation after the financial crash and recession,” James Roddy, Business Development Manager, ICM Capital, headquartered in London, tells GN Focus.
In September, the Economic Sentiment Indicator increased by 1.6 points in the euro area (to 96.9) and 2.4 points in the EU (to 100.6). The sharp increase in the EU brought the indicator above its long-term average for the first time since July 2011.
“On a three-to-six month view, European stocks and high yield bonds could see a further upside. This is because of a short-term fiscal and monetary stimulus from China, which is improving the euro area exports to emerging markets,” says Arjuna Mahendran, Chief Investment Officer, Emirates NBD Wealth Management, tells GN Focus. “The decisive vote in German elections and the Fed rejecting calls to taper its money printing programme will also bring more liquidity to the euro area financial markets. However, on a 12-month view we would be underweight in the euro area as structural reforms are still on the back burner in southern nations and the emerging markets have their own imbalances, which will be brought into sharp focus once more as soon as a new Fed chairperson is appointed in early 2014.”
Analysts say that with major central banks, including the European Central Bank, maintaining a historical loose monetary policy the positive growth conditions should hold up for the near term. However, in the mid-term Eurozone needs to address still-high unemployment numbers, which threaten to create a negative loop in its economic activity.
In a recent speech, László Andor, the European Commissioner responsible for Employment, Social Affairs and Inclusion, said that more than 26.6 million jobseekers are still without jobs in the EU, even though the numbers stabilised after the region’s official emergence from an 18-month recession in the second quarter. For some experts, the answer lies in relative safety.
“I do believe that there are opportunities in the old world which are attractive and less risky than frontier and emerging markets,” says Eduardo Leemann, CEO, Falcon Private Bank.
The case for Switzerland
However, not all countries are equally attractive. “Although all of Europe has potential, you have to be selective. We should still be very cautious about banks and probably all finance stocks (such as insurance) as there is still a big euro problem,” says Roddy.
Some countries — and Switzerland is one of them — are more attractive than others. “By most economic measures Switzerland, unlike most of the Eurozone, is running on all cylinders. This is even more impressive considering how well the Swiss economy held up during the global downturn. For 2013 and 2014 GDP growth is expected to come in around 2.0 per cent while the unemployment rate should remain stable around 3.2 per cent,” says Mario A. Camara, CEO, Swissquote Bank MEA.
Switzerland is not routinely placed in the same economic debate with the Eurozone economies, particularly since the country does not share a monetary policy or currency with the Eurozone, enabling it to make discreet policy decisions. “With its domestically controlled policy the Swiss National Bank (SNB) was able to tame the strength in the Swiss Franc (CHF) through minimum exchange rates in euro/CHF of 1.20 and 0.0-0.25 policy rate band, in order to limit damage of critical exports,” says Camara.
The Swiss Market Index, for instance, is up by 15.6 per cent in 2013. “Swiss stocks and bonds will continue to be attractive, so we would selectively invest in this market for the longer term,” says Mahendran.
Relatively speaking, Switzerland is a significantly more diversified economy compared to many other individual European economies. It is not only a financial centre and tourism hotspot, but also home to many global corporations and international bodies such as the United Nations, non-governmental organisations and multinational scientific centres such as the European Organisation for Nuclear Research (Cern).
The case for Switzerland is even stronger if it encourages diversification in trading partners as well. “The Eurozone is Switzerland’s leading trading partner. Although a bulk of that trade is with Germany, the economic engine of the EU, the weakness of the rest of the economies in the Eurozone will clearly have a negative effect on the Swiss economy,” says Camara.
Growing sectors
Within the country, some sectors are very promising. Luxury goods, including the watch industry, and specially companies with aggressive strategies to target newer markets, are predicted to do well. Also, Switzerland remains the centre of the European biopharma sector, with two of the largest drug companies in the world, Roche and Novartis both located in Basel, along with hundreds of other companies.
“Health care is one of the best performing sectors in equity markets in the past three years,” says Mahendran. “This is because of the ageing populations in Japan, Europe and the US spending more on health care and the spread of noncommunicable diseases. Switzerland is poised to continue benefiting from this trend given the sizeable presence of Swiss firms in the health-care space. Mergers and acquisitions will continue to boost the prospects of the sector worldwide, despite the slight confusion on drug pricing emanating from the Obama-care programme.”
Camara recommends that while giants such as Novartis, Roche and Merck promise long-term sustainable growth, medium-size firms in the biopharma industry, such as Lonza and Actelion, are likely to give investors a larger opportunity for growth if they have a larger risk appetite.
The country has long been a chosen second or third home for investors from the region who continue to flock to it. Camara, whose company has designed a savings and trading account for the region, says, “We expect Switzerland to remain a jurisdiction of choice for investors in the Middle East and for the expatriate community at large.”
