The likelihood of a significant interest rate hike in Switzerland is small, says portfolio manager
The global pandemic, supply chain disruptions, Russia’s attack on Ukraine and rising inflation.
Numerous factors are threatening global growth, but Switzerland is likely to continue to provide attractive prospects, predicts Eleanor Taylor Jolidon, Co-Head of Swiss and Global Equity at Union Bancaire Privee (UBP), one of the largest private banks in Switzerland.
“Given the situation in Ukraine, we have to accept that inflation will probably last longer than previously expected, but it will probably not stay at the current levels. We expect inflation to come down, but it will do so more slowly because of the effect of the energy prices,” Taylor Jolidon says to AMWatch.
She also notes that a recession scenario would play out differently than in the past.
“Although inflation will continue and potentially higher interest rates could dampen economic activity, there is more or less full employment. Consumer and corporate balance sheets are very healthy and there appears to be willingness to spend at the government level,” she says.
”We do not have the same inflationary pressure”
Taylor Jolidon has invested in Switzerland since she joined UBP in 2008, after which the company’s assets under management in Swiss and global equities have grown from USD 150m to USD 5-6bn. Against the backdrop of current market volatilities, the Swiss market, which has consistently outperformed the MSCI World index thanks to its value creating nature, remains an attractive investment target, Taylor Jolidon believes.
Switzerland is a particularly liquid market with a strong economy, she says.
“It has never had an unemployment problem, but rather a chronic labor shortage. With its very strong currency, Switzerland is somewhat protected from hikes in energy prices. That means that we do not have the same inflationary pressure and that the likelihood of there being a significant interest rate hike is very small,” she says.
Switzerland relies on hydro and nuclear power to meet the bulk of its energy demand. According to the Swiss Broadcasting Corporation (SBC), Switzerland remains by and large dependent on imports (around 72% in 2020) and is therefore sensitive to price fluctuations on the European electricity market. The four active nuclear reactors on Swiss soil produce almost 40% of the country’s electricity, and almost half of the gas used in Switzerland, or 15% of the fuel for the country’s total energy consumption, comes from Russia. The country has set the goal of achieving net-zero carbon emissions by 2050.
“Switzerland currently relies on imports of nuclear energy, and exports peak-time hydraulic energy to some of its neighbors. It has some exposure to gas and oil, much less than some of its neighboring countries, and a portion of that gas and oil comes from Algeria and Libya and not from Russia,” Taylor Jolidon notes.
In comparison, neighboring Italy produces more than 40% of its electricity from natural gas, and its main supplier, Russia, provides approximately 40% of it.
Navigating in an increasingly complex setting
Despite the prospects Taylor Jolidon mentions, early 2022 has been a challenging time for the funds she co-manages.
In late June, the UBAM - Swiss Equity fund Taylor Jolidon manages jointly with Martin Moeller, had pulled in a negative return of -28.01% YTD. The top five holdings in the fund are Roche, Nestle, Zurich Insurance, Novartis and Lonza.
Meanwhile, UBP’s Swiss Small and Mid Caps Article 8 equity fund, which Taylor Jolidon co-manages with Bettina Baur, has yielded a return of -32.77% YTD. The largest five holdings in this fund are hearing aid company Sonova, logistics company Kuehne & Nagel, dentistry implant producer Straumann, and two famous chocolate manufacturers, Lindt & Spruengli and Barry Callebaut.
When asked about the factors behind the performance of the two funds, Taylor Jolidon says that the team concentrates on identifying companies that are creating value because they are either at a stage of growing, or maintaining at a high and stable level, their cash flow return on investment.
”Outside periods of rotation towards the ’value’ portion of the market, this concentration on value creating, or quality, stocks has been a successful strategy,” she notes.
Going forward, Taylor Jolidon expects to have to navigate a more difficult market. Her expectation is that the financial sector will end up benefiting from the hike in interest rates. Freight forwarders will benefit from the setting as well, as disruptions to supply chain this spring in China due to new Covid-19 outbreaks are likely to increase their workload. The automotive industry, on the other hand, will take a hit from the current instability.
“The automotive sector in Europe is obviously under considerable pressure because of the supply chain being based in Ukraine, and is not only suffering from disruptions in China,” she says and adds that investors may be cautious of investing in restaurants.
“Companies which are consumer-facing may also feel some pressure as people may choose to scale down the type of purchases they make,” she notes and concludes:
“Globally, what may be to come is a situation where the combination of high energy prices and high interest rates do dampen the consumer market, but do not dampen corporations to the same extent. Nevertheless, the market will be more complicated to navigate.
ESG manager blasts Swedish Article 8 funds: ”You’re basically selling hot air”
Swiss investment firm enters the Norwegian leveraged products market
Global government debt set to soar to record levels in 2022, manager predicts
