FX strength creates a headwind for Swiss companies because of their global nature. With a limited domestic market of some 8.7 million residents1 (around the same population as New York City), Swiss companies must generate international revenues to survive. There’s some variance in the impact of FX strength based on size, as large-cap names like Nestlé are truly global players with domestic revenues only accounting for 1% of the total, and R&D-heavily companies like pharmaceuticals also experience FX headwinds more strongly, but overall it’s a manageable headwind.
How? Thanks to a unique feature of Swiss companies.
Every year Swiss businesses set out to increase productivity by at least 3% to counteract currency strength. It’s like corporates make a New Year’s resolution to hit the productivity gym – they must get stronger, more efficient and more innovative to remain competitive. As a result, Switzerland has led the Global Innovation Index for the past twelve years. This is why we see so many examples of strong, growing companies in Switzerland that boost unique pricing power. The constant push to evolve fuels innovation and creates an edge – and as market leaders, clients will, to a degree, accept higher prices.
Conversely, Swiss companies that offer mediocre or mass-market products have little to differentiate them and create pricing power. Their customer base can easily shop around and go elsewhere. These are the names that we expect to see struggle against the strong franc.
In our portfolios, we are biased to names that have a defendable “moat”, which is a unique competitive advantage, and the ability to deliver resilient compound growth. These are the companies that we expect to outperform this year. Even after two years of rapidly rising inflation, names like Straumann in the dental sector and the chocolatier Lindt & Sprüngli remain global market leaders with the ability to push prices.
Cash could also prove a performance-defining factor this year. For example, the elevator and escalator firm Schindler Group has net cash of 2.5 billion francs. This gives it an advantage, as acquisitions can be made from a strong currency base. We expect to see an uptick in M&A activity this year by Swiss companies due to the strong franc.
So, while FX headwinds are strong, they come as no surprise to Swiss firms. We expect those with strong pricing power and healthy cash reserves to do well despite franc strength, and growth names that are compounders with defendable moats to lead the outperformers.
1 United Nations, latest data for 2023.
