Summary
AI-led momentum has dominated market behaviour, leaving company fundamentals underappreciated.
Swiss quality growth has been left behind, creating a disconnect between valuations and underlying business resilience.
Swiss small- and mid-cap (SMID) valuations look attractive relative to large caps, with scope for re-rating if fundamentals regain importance.
We remain focused on quality compounders, with current overweights in Industrials, Health Care and Information Technology.
What did H1 change for Swiss equities?
The first half of 2026 reinforced the extent to which markets are being driven by narrative rather than hard facts. AI-related euphoria remained the dominant force, while company fundamentals received less attention from investors, even where earnings and outlooks have remained solid.
This has been particularly challenging for fundamental investors in Swiss SMID. Momentum has become a more dominant factor in security prices, while algorithmic and quantitative strategies have amplified single-stock, theme-basket and factor volatility. At the same time, capital has continued to concentrate in AI-related themes, hyperscalers, semiconductors and passive vehicles, favouring large-cap, growth-oriented and momentum-driven securities over traditional SMID compounders.
What remains investable across scenarios?
Quality growth outside the AI theme has been left behind. In our view, investors have become too sceptical about the ability of these companies to grow again, triggering valuation compression across parts of the market. Some perceived safe-haven assets, including real estate and regional banks, have benefited from significant flows, while high-dividend aristocrats have been largely ignored.
We continue to believe that quality growth can stage a comeback as momentum eventually reverses and investors refocus on fundamentals. Swiss companies with compounding characteristics, attractive risk/reward profiles and diversified investment drivers remain well suited to a range of scenarios. A soft reflationary environment, combining modest growth with somewhat higher inflation, would also be supportive for Swiss quality-growth stocks.
What is the market mispricing?
The most significant mispricing is the valuation discount of Swiss SMID relative to large caps. The SPI Extra currently trades at a P/E premium of approximately 15–20% to the SMI, versus a long-term historical average of 25–30%. This compression is not explained by deteriorating fundamentals; earnings and outlooks for SMID companies remain solid.
It reflects instead the structural dominance of momentum and passive flows that have favoured large-cap indices. The mispriced risk on the other side is the fragility embedded in the AI and momentum trade itself: hedge fund positioning and margin debt are at notable extremes, and any normalisation of flows could be abrupt and disproportionately benefit fundamentally driven smaller companies.
Where are you cautious?
We remain cautious on areas where valuations and flows appear disconnected from fundamentals. While not our base case, a prolonged period of geopolitical stress, particularly in the Middle East, could trigger a stagflationary shock and potentially deteriorate into recession. Broader risk-off dynamics could also be driven by US dollar depreciation, US debt expansion or erratic policy decisions.
We are also alert to the potential disruptive impact of AI on existing intermediation businesses, as well as the possibility that stress in private credit markets could signal wider credit losses. More broadly, we believe markets dominated by retail investors and quantitative strategies may continue to exaggerate volatility and create short-term headwinds for fundamental investors.
How are you positioned, and where would you add if volatility creates better entry points?
We remain focused on quality compounders trading at reasonable prices, with an emphasis on attractive mid- to long-term upside, favourable risk/reward and diversified investment drivers. Our current positioning is overweight Industrials, Health Care and Information Technology, with a significant underweight to Real Estate, where flows have driven valuations to levels we consider disconnected from fundamentals.
Recent portfolio activity reflects continued conviction in selected quality names, with additions to DKSH, Emmi, Galderma, Georg Fischer, Lindt, Sonova, Straumann, Swissquote, Temenos and VZ.
Should volatility create better entry points, our highest-conviction additions would be across three areas.
- Quality growth names where valuation compression reflects momentum headwinds rather than any deterioration in fundamentals. In our view, these represent the clearest disconnect between price and intrinsic value.
- Industrials with exposure to a European manufacturing recovery. Historical data shows a strong correlation between manufacturing confidence and SMID outperformance relative to large caps. With the indicator at depressed levels, even a modest upturn would act as a meaningful tailwind.
- Multilocal industrial producers pursuing M&A to extend their geographic footprint – a theme that offers alpha potential independent of the broader market direction. Dividend aristocrats, which should benefit further from Swiss rates returning to zero, would be added selectively at more attractive levels.
All data as at 31 May 2026 unless otherwise stated.
The companies referenced in this insight are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell. The information provided is to illustrate our current investment activities and approach only, and should not be construed as offer, research or investment advice. Past performance and other indicators or metrics do not predict future outcomes. Please read important information at the end of this communication.
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