investment viewpoints

Swiss Equities: a turning point in the stock market?

Swiss Equities: a turning point in the stock market?

On Monday, 26 August, industry experts came together in Zurich to focus not only on the Swiss economy and Swiss equities, but also on how megatrends are changing our society and the economy. We have summarized the most important and interesting information about what makes Swiss equities so special and why it is worth investing in the Swiss market.


MEGATREND DIGITAL REVOLUTION - a conversation between Johan Utterman, Head of Swiss Equities and Panagiotis "Takis" Spiliopoulos, CFO of Temenos, the market leader of digital banking platforms

Tenemos is the leading provider of banking software and is represented in over 150 countries. In 2018, the Geneva-based company had a turnover of US$846.7 million. This was an increase of 15 percent over the previous year.


To what extent do technological developments change consumer behaviour and the way people interact with their banks relatively quickly?

When we talk to our customers, there is one major issue that comes up. We call it "the customer's journey". This issue affects customers of all ages, equally. They use services like Amazon, Uber or Paypal and expect similar offers from their banks. However, this is only one element of the trend. At the same time, customers expect an increase in efficiency and information and thus a reduction in costs. These digital trends move and change the behaviour of customers sustainably. 


What are the implications of the Open Banking Initiative?

Open banking is a good example of a regulatory initiative, which has been favourably received. The idea is that it opens the banking area so that customers have a wide range of services at their disposal. Banks are expected to make their customers' data available to other players, such as fintechs or competitors. We have also observed that some platforms bundle the financial services of all players. We do currently offer products in this area. However, demand for these products is not yet very high.  


How far do key factors such as the cloud, blockchain and  application programming interfaces (APIs) change the banking landscape?

Demand for blockchain has so far been rather restrained in the banking world. APIs or programming interfaces, however, are key factors that we strongly recommend. We have more than 700 APIs in our portfolio. Banks can decide which services they want to offer their customers. This can ultimately result in a good mix, consisting of internal or external products, think tanks but also solutions from competitors. As far as the cloud is concerned, we have been active in this area since 2011. However, we are observing a certain reluctance on the part of T1 and T2 players in particular to enter the cloud. A little more than 30 banks are currently in the cloud, including neo-banks, challenger banks and a few small banks. Everyone is talking about going into the cloud. But we can't see a big movement in this direction at the moment.


Tenemos currently offers six products. How do they differ?

We call our products the "six engines of growth". The first and most important product is "T24", which generates around 65 percent of our revenue from software licenses. "T24" is a central banking system that provides all banks with transaction processing, operational scalability and functional depth. The second product is "Infinity", which accounts for approximately 15 percent of our revenues. "Infinity" is a digital front-end solution that provides mobile and internet banking. The third growth driver is "Fund Management", which offers customers administration solutions. With "Payments", the fourth element of our product range, we provide repair and execution services in the internal area of banks. The fifth product is the "WealthSuite", which is aimed in particular at asset managers. The sixth element of the growth engines provides all products both in the cloud and on the hard drive.


Can you tell us something about the size of the market and its growth potential?

The relevant market for banking software is $57 billion. However, around 80 percent of this is not tappable, because these represent budgets that are spent internally. Only about $12 billion is outsourced and thus accessible to third parties such as Temenos. Approximately 20 percent of the market is divided into revenues from software licenses and the maintenance of existing systems. However, this is a large portion of the market that is available to us. Over the past few years, we have also noticed that the market share we have access to is growing slowly and steadily. The growth rate is around 8 percent and experience has led us to believe it will remain relatively constant. Our market shares are growing proportionately, with the US market growing faster than other markets. We believe that the US market will account for 50 percent  in the long term.    


What are your expectations and goals?

Our long-term goal is to achieve a "winner takes it all" position compared to our competitors. At $200 million, we spend significantly more money on research and development than most of our competitors. We believe that we will eventually grow twice as fast as the market.


How much planning visibility will Temenos typically have on customers' budgets (in terms of maintenance, services, etc.) in the next 12 months?

Overall, we can say that we can estimate about 85 percent of sales. Our forecast is guided by items such as the ‘committed spend’, which we agreed with our T1 customers in advance.


Finally, a completely different question: What about CSR initiatives at Temenos?

I can give you an example of our CSR initiatives in India and Romania, where we invest money to provide people with adequate education and thus try to help reduce poverty. Gender diversity is another important issue. Around 47 percent of our employees under the age of 30 are women.


WHAT ABOUT THE SWISS ECONOMY? An analysis by Prof. Dr. Jan-Egbert Sturm, Professor of Economic Research and Director of KOF (Konjunkturforschungsstelle der ETH Zurich)

According to Jan-Egbert Sturm's analysis, long-term prosperity is based on three determinants: technological progress, specialisation; and political and institutional framework conditions. These determinants are closely related to globalisation, which is of fundamental importance for the global economy, and for Switzerland. The globalisation index shows that globalisation strengthened in the 1990s onwards but has flattened out again since the financial crisis. World trade, too, has fallen to 2.2% since the financial crisis, compared with an average annual growth rate of 6.6% over the previous decades. This also has consequences for value added, as industrial production is now 1:1 with world trade. The danger is that a further weakening of world trade would also have consequences for industrial production. This, in turn, would have an impact on the global economy as a whole.


Advantages for Switzerland

Looking at the Swiss economy, which has recovered well after the Swiss franc shock, it is in a better economic position than the global economy as a whole. It is worth noting that, for the first time since 2010, the mood among Swiss companies is better than among German industrial companies. A decline is also evident in Switzerland, but it is by no means as pronounced as in its northern neighbour. According to Jan-Egbert Sturm, German industry will feel the global downturn more strongly or somewhat more strongly than Swiss companies, some of which are active in other sectors. It benefits from the strong pharmaceutical sector, which contributes to enjoy stability. Broken down into the various sectors, the picture is heterogeneous. Sectors that are heavily dependent on foreign trade, such as wholesale and manufacturing, are suffering more than, for example, the construction sector, which is still very stable or even slightly better.


KOF growth forecast

What does this mean for the future of Swiss GDP growth? The June forecast is still quite optimistic with GDP growth of 1.6% after 2.6% in the previous year, but according to Jan-Egbert Sturm it will probably have to be revised downwards in September/October. International sporting events (IOC, UEFA, FIFA) now have a noticeable influence. These take place in the even years, which is reflected in the growth in consumer-related services. This growth driver will disappear in 2019.


HOW DO INVESTORS FIND SWISS SHARES WITH POTENTIAL? Johan Utterman, Head of Swiss Equities at Lombard Odier Investment Managers, & Team on their current positioning and approach to success 

There is much to be said for Switzerland as a business location. Switzerland ranks first in the Innovation Scoreboard of the European Union and is one of the four leading countries in the IMD world competition ranking. In the global context, Switzerland leads in terms of return on equity and excess dividend yield. The increasing uncertainty in the markets means that the Swiss franc (CHF) tends to be used as a safe-haven currency, which increasingly supports equities denominated in CHF. In addition, Switzerland tends to outperform other markets in volatile phases. Many Swiss companies also pay high dividends. An average dividend yield of 3% in the SPI compares with a negative yield of -1% on a 10-year federal bond, which clearly speaks in favour of Swiss equities. In the US market, the difference is much smaller with 1.9% dividend yield and 1.6% on the bond side.

In addition, the Swiss location offers the advantage of a liberal market so that companies have the necessary cost flexibility to react to a possible downturn. Small and medium-sized Swiss companies in particular are showing competitive historical and future-oriented earnings and cash flow growth rates. This is often supported by structural growth drivers, attractive niche positioning and innovation as well as quality-driven pricing. Another crucial point is that Swiss equities are more strongly exposed to defensive sectors. In Switzerland, it is mainly the big banks that are known, but it is a fact that over 55% of the Swiss equity market consists of pharmaceutical and food producers - sectors that are rather defensive.


More defensive positioning in the portfolio

In the small and mid cap portfolio, the team started to adopt a more defensive stance in 2018. This came after key indicators such as the Manufacturing PMI peaked in September 2017 and then moved lower. As a result, the team reduced cyclical stocks from the industrials or materials sectors in favour of more defensive stocks, which had a very positive impact on the portfolio and performance. The team is trying to be very selective in these sectors, which are affected by weakening global growth. On the radar are companies that are benefiting from structural growth drivers. On the other hand, companies with a high exposure to the Manufacturing PMI are avoided. This includes Bosshard, for example. According to our own analyses, 85% of organic growth is correlated with the purchasing managers' index.

What in turn comes to the fore are structural growth stories such as the global rail equipment market. The best example of this is Stadler Rail, which is benefiting from increasing urbanization, rising population numbers and the increase in the average number of kilometers travelled by rail. The stricter CO2 regulations are also having a positive effect on Stadler Rail's business, which also has a high visibility on the sales side. Last but not least, the company is very flexible on the cost side.


Although the healthcare sector tends to be defensive, the team has not overweighted it. The reason for this involves the ongoing discussions about drug prices in the run-up to the elections in the USA. Roche is currently preferred due to its strong R&D pipeline and the valuation discount on its competitor Novartis.

The financial sector is overweight, especially in defensive companies such as Cembra Money Bank or BCV with their high dividend yields. Of course, Temenos is also one of the portfolio holdings. Within Financials, Johan Utterman prefers insurers, and Zurich Insurance Group is one of them. Here, too, an attractive dividend yield, the share buyback program and improved pricing speak in favor of an investment.

Another large cap favorite is Nestle, which under Mark Schneider is making very good progress in almost all areas, accelerating sales growth and improving margins while making the right decisions about divesting businesses.


Sustainability as an important factor in stock selection

The focus of Lombard Odier IM is on high-quality market leaders with stable cash flows and returns, structural, above-average sales and earnings growth and attractive dividend yields. Organic growth drivers relative to GDP growth, operating and financial leverage, margin outlook, capital requirements, free cash flow, working capital and return on invested capital/equity, absolute as well as relative valuations and dividend yields.

Sustainability is of particular interest when selecting shares. LOIM is convinced that sustainability will increase future returns. In order to identify which Swiss companies are best positioned, LOIM follows a 3-pillar principle. This assesses the sustainability of a company's financing model, business practices and business model.


Pillar 1

The starting point of every investment decision is the financial strength of a company

Pillar 2

In order to generate long-term added value, a company must pay equal attention to both its business practices and its financial performance

Pillar 3

Review the sustainability of a business model with a view to the long-term trends of a global economy moving towards a more sustainable model.


The evaluation of all factors is complex and the key areas of "healthcare" and "financial services" require specialist knowledge. The LOIM team is made up of experts from these industries in order to do justice to the assessment of these topics. (Healthcare and financial services account for 59% of the SMI index weights, 53% of the SPI and 36% of the SPI Extra).

An essential point is risk management. LOIM adheres to strict risk management parameters and focuses on liquidity, disciplined profit taking and position sizes in terms of volatility and market sensitivity.

important information.

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