What is your scenario for Swiss equities in 2024?
We believe markets will focus on corporate earnings growth after focusing on the trend in interest rates. Interest rate fears are gradually fading.
In Switzerland, the development of profits is a function of the currency. The strong franc costs 5 to 6% of sales to Swiss companies. This monetary pressure is forcing Swiss companies to accelerate their efforts to innovate and increase productivity.
We believe 2024 will be a positive year for equities. The positive factors are underestimated due to the favourable impact of the Inflation Reduction Act on Swiss groups. A quarter of Swiss companies' sales are generated in the United States. Technological changes, from artificial intelligence to digitalization to health diagnostics, are expected to benefit the stocks of innovative Swiss companies that are able to implement them quickly.
Has the outlook for the Swiss market improved significantly by the recent decline in the Swiss franc?
They are a little less negative. Compared to the previous year's average, the Swiss franc had a negative effect of 4% on sales and further reduced margins.
What do you think of the current valuation of Swiss stocks?
The valuation of Swiss equities has returned to its historical average. In 2020 and 2021, Swiss small and mid caps had a high premium over large caps. A convergence then occurred between the two segments of the listing and today the securities are trading between 18 and 19 times 2024 earnings. I think that level is acceptable. Profits are expected to increase by 8-10% this year. These estimates could be reduced by the fact that financial analysts are waiting for the release of results before correcting their estimates for 2024.
The strong franc costs Swiss companies 5 to 6 percent of sales.
What is your opinion on the latest results?
Companies have generally met market expectations. Their forecasts for 2024, however, were unclear. The market accepted fairly average results when the forecasts turned out to be a bit more favorable. I deduce that the investor is ready to look beyond the next 2 or 3 quarters, particularly in semiconductors. There has been a recession in this sector. The first quarter of 2024 could also remain mediocre, but the market anticipates further improvement.
Haven't the three Swiss semiconductor-related stocks (Inficon, VAT and Comet) appreciated too strongly in recent months?
The rise in these three stocks surprised us with its strength, so we took some profits in this sector. But it's important to know that a rebound in semiconductors is always stronger than expected. Companies tell us that their visibility is very limited. The market interprets these statements negatively, believing that companies have no visibility. However, visibility is also very modest when the recovery occurs. In this sector, the market is either down 40% or up 40%. The market anticipates a 10-12% increase in sales in 2024 and an increase of the same magnitude in 2025. It is likely that the recovery will come strongly, or not at all.
Which of the three Swiss semiconductor stocks is your favourite?
All three are present in semiconductors but in very different fields from each other. Comet is the most exposed to the rebound in memory chip sales, but the company has developed a new product that is entering the launch phase, in power generation.
In tech, we also have a position in Temenos. The group suffered an offensive from the Hindenburg Fund. We have maintained our positions. The company will publish the results of the external report commissioned by Temenos on April 15. We hope that the attacks affect only a very small part of the business.
Do you prefer tech, cyclicals or defensives, in small and mid caps?
We are underweight industrials, but only slightly. On the other hand, we are overweight information technology, with semiconductor stocks mentioned as well as ALSO, and financials.
Why overweight financials?
We are exposed to financials in part to strengthen the value part of the portfolio.
Within this sector, we really like Swissquote, a fully digital company, with very attractive growth and return on equity, so a real compounder according to our definition.
Cembra is also a popular stock in our small & mid caps fund and large cap fund. The company is fully active in Switzerland and was able to make up for the loss of its contract with Migros very easily. When the decision was announced, the stock had fallen by 35%. Today, Cembra has managed to retain a large part of the customer base.
We also have positions in Baloise, for its valuation, and Julius Baer, which we accumulated after the change of CEO and the decline in the shares. Julius Baer can also be the means chosen by a foreign company to enter the Swiss wealth management market through an acquisition.
We are looking forward to positive information from Roche on a new therapy for Alzheimer's and two new products purchased last year.
Is your approach sectoral?
No. Our approach is entirely bottom-up and the result of the analysis of the different companies.
Why is the weighting in healthcare low in your small & mid caps fund and high in the large caps fund?
In large caps, we are heavily underweight Novartis and overweight Roche following purchases in recent weeks.
Why choose Roche, a stock on a medium-term downtrend and, from a sustainability perspective, which was criticised by Ethos at the general meeting for issues of management remuneration and low environmental ambitions?
We've been accumulating the title recently because everyone is picking up on the criticisms you mention, which is a lack of ambition and growth as well as failures in the areas of Alzheimer's and oncology, not to mention a negative covid-related base effect.
Roche's growth is significantly lower than that of Novo Nordisk and Eli Lilly. But in the coming quarters, we expect positive information from Roche about a new Alzheimer's therapy and two new products purchased last year. With the help of some positive information, the trend of the stock could be changed favorably. Recently, the valuation has fallen to an all-time low of 13 times 2024 earnings, while Eli Lilly's is 61 times.
One event seems to me to be indicative of the group's commercial difficulties. The molecule used by Eli Lilly to fight obesity was developed by Chugai, Roche's Japanese subsidiary, which sold it to the American pharmaceutical group in 2017 thinking that it would not have a sufficiently fast market potential. We know the tremendous success that Eli Lilly had with this one.
Will it take a decade for the Basel-based group to recover, as we saw with the end of Valium? Aren't you too far ahead?
It's possible, but in the last 3 years, Roche has lost 45% of its sales due to the expiration of patent protection. The company was able to compensate for these losses with new products in areas in which it was not present, such as immunology and multiple sclerosis. I am curious to see if Novartis will be able to present such a capacity for innovation, which will also have to compensate for the loss of important patents. I have my doubts about that.
What's next for your strategy?
We want to position ourselves in growth stocks that not only have a positive outlook in 2024 but will be innovative enough to ensure profitable and sustainable growth over the long term.
What are the strongest positions in relative terms relative to the index?
These are Cembra, whom we have already mentioned, and Schindler. The elevator group has solved its internal problems and is benefiting from its oligopolistic position with very attractive profitability in its services activities.
Temenos is one of our favorites, with very good growth potential in banking software, as well as Tecan, Straumann and Comet. These companies have very high growth potential and profitability. With interest rates stable in 2024, a company that is able to present the results expected by the market will trade with a higher premium.
Doesn't Schindler have lower margins than its competitors and a valuation that is too high?
Schindler is coming out of a period in which it struggled to adjust its prices upwards and to properly manage its purchases of raw materials. The new management has solved the internal problems. The group also suffered from its exposure to Chinese real estate. In reality, China accounts for only 16% of its sales. We believe that the market underestimates the flexibility to adapt its new facilities and the gradual improvement of its margins.
The market is often very attentive to a company's operating margin. We prefer to focus on the return on invested capital. In this respect, Schindler is one of the best placed in Switzerland because it uses little capital in its service activities.
More generally, successful Swiss companies are international family-owned groups in B2B. With protectionism and geopolitical risks on the rise, will Swiss industry be one of the big losers in the transformation of the global economy?
No, on the contrary. Swiss B2B companies will be the main beneficiaries of the transformations in the global economy. The major customers of Swiss subcontractors, such as ASML in semiconductors, repeat that they want to reduce the number of their subcontractors and focus on the best of them, i.e. those who have the capacity to innovate and follow them in the countries where they open factories. Swiss companies fall into this category, such as ASML's Inficon, which has said its suppliers will increase from 5,000 to 1,000.
The question for these companies will be whether to take a stand for China or the United States. An article in the Financial Times, for example, indicates that Malaysia will benefit from the conflict. However, VAT has factories in Malaysia and Comet has increased its production there.
Swiss companies can innovate and add products that complement their offering by meeting the new needs of large groups. Most of our companies have global exposure.
Swiss subcontractors are suffering from the German outlook. Do you avoid those companies?
The main concern of Swiss industrialists is Germany, in real estate, construction and industry. Concerns are not cyclical but structural. The German automobile industry faces strong competition from Chinese manufacturers. And the political authorities are struggling to respond to the challenges, as shown by the lack of housing. In the past, Germany managed to get out of a difficult phase through innovation. Today, nothing is less certain.
This interview was prepared by Emmanuel Garessus for Allnews and first published on 22 March 2024.
