"The Strong Franc Helps Whip Swiss Companies into Shape"
Swiss companies are complaining about the strong Swiss franc. However, from an investor's perspective, that has benefits, says Burkhard Varnholt, CIO of Credit Suisse (Switzerland). In an interview, he reveals what asset classes are underrated and why he recommends alternative investments like hedge funds to even cautious investors.
Why should investors put their money into the Swiss market?
Burkhard Varnholt*: The Swiss market is recommendable both from an international perspective and for Swiss investors. In a sense, it represents a small-scale model of the world. The national economy of Switzerland is competitive and open and has benefited from the global economy. In spite of many difficulties for the Swiss export industry, the strong Swiss franc has helped us achieve that.
Strength comes from adversity. On the one hand, the strong Swiss franc poses a major challenge for businesses. On the other, it helps whip companies into shape over the long term. Investors can profit from that. For example, with Nestlé, they are investing in a global market leader. But that's not all. Swiss equities are, at the same time, noted for their relatively inexpensive valuations compared to American or European securities, especially in terms of price-to-earnings potential.
What does your forecast for the Swiss economy look like?
We are experiencing a strong global economic recovery. The International Monetary Fund, the IMF, recently revised its forecast for worldwide economic growth in 2017 upwards to 3.5% and for 2018, to 3.6%. That shows the global economic engine is currently firing on many of its cylinders. There is strong economic momentum in Europe, as well. This is important for Switzerland. In my experience, the current economic cycle is one of the strongest since I started working in the banking business – that is, over 20 years ago – because it is synchronized.
Will the Swiss Exchange be able to reap the full benefits of this economic development?
That is always hard to say because there are other factors that have an effect on stock market trends. At the moment, Switzerland is one of our most favored equity markets, together with Europe. Switzerland, however, is very closely linked to Europe. So, what happens within Europe, particularly regarding the European Central Bank's (ECB) monetary policy, is correspondingly important. Right now, there is no change of course on the horizon. ECB President Mario Draghi is still propping up the economy with central bank funds, even though that is generally no longer necessary for Europe. He is biased because of the misery in Italy, where elections will be held in 2018. That makes Italy Europe's next big risk.
What Swiss equities should investors bet on in order to profit from the current trend?
The main principle of a successful investment strategy is diversification. I love to see index-tracking core building blocks in a portfolio. However, small and medium-sized enterprises tend to be neglected as a segment. Besides that, it is very much a matter of personal style whether someone wants to put their money in dividend-paying stocks or bet on capital gains, for example. I have a personal preference for capital gains. That is mainly for tax reasons. Maybe I am still too young for a dividend-based strategy because older people in particular often opt for the income security provided by dividends over possible capital gains.
In my view, two-thirds of the real estate boom is over.
Burkhard Varnholt, CIO of Credit Suisse (Switzerland)
Which sectors are especially attractive at the moment?
The health care industry is a supertrend. It is pretty shaken up right now, but it has a lot of upward potential. People are living longer and longer, as well as spending more on their health and beauty and a corresponding lifestyle. That is why the health care sector is becoming increasingly important. People can invest in pharmaceutical, medtech, or biotech companies. Of course, diversification is important there, too.
In your view, are any Swiss investments currently priced too low?
I could perhaps name the financial sector in particular. It has tremendous potential for recovery. To put it differently, the financial sector doesn't need much to pull off a pleasant surprise.
How are things looking in the real estate sector? Do investments there still pay off?
In my view, two-thirds of the real estate boom is over. Yet, if interest rates remain low a while longer, that will continue to have a positive effect on the sector. Real estate is a good alternative, especially when it comes to diversification. They work like bonds, but they offer more room for creativity and greater prospects.
What other alternatives to bonds do you recommend to conservative Swiss investors?
Catastrophe bonds, also known as cat bonds, may be an alternative. Their big advantage is that there is absolutely no correlation between how they and the financial markets work. I also see some opportunities in non-traditional investments. They can also be used to diversify portfolios. That is because they are not tied to stock market cycles.
Many careful investors are wary of alternative investments such as hedge funds and other non-traditional instruments. Nevertheless, you are expressly recommending them as an alternative to bonds. How do you explain that?
The amount of risk from alternative investments is always a question of how they are monitored or structured, especially with hedge funds. That makes complete disclosure and transparency very important. I have personally had good experiences with alternative investments. However, since they are more difficult to assess, I prefer to invest through a mandate: I define the strategy but delegate the investing to the professionals. They can monitor the risk much better than I can.
Twenty years in the business have taught me that calm investing works best.
Burkhard Varnholt, CIO of Credit Suisse (Switzerland)
Where do you see long-term opportunities in the Swiss investment market?
For long-term investors, I recommend private equity. This asset class is increasingly becoming a typical investment for private investors. Compared to the English-speaking world, however, they are still rather neglected in this country. That may have something to do with the fact that many private equity managers come from English-speaking countries, and the information is not easy for Swiss investors to understand. That obstacle could also be overcome by issuing a mandate.
Many investors prefer to remain in their home markets. They know them best. How important is it for Swiss investors to invest globally, rather than just in their home market?
The argument that "it's what I know best" is fundamentally incorrect. Investors know only as much as the stock exchange knows. The global market is everybody's investment universe. It offers the widest possible diversification. And that is the only truly free lunch there is. Global diversification is the most rational investment strategy – even if a person's emotions often advise against it.
Which countries are particularly enticing from a Swiss perspective?
That, of course, changes with the economic and market cycles as well as their most recent assessments. With many investors, emerging markets are underweighted. Over the next few years, that is where growth will be taking place, however. Their share of the market's capitalization is still very low even though they contribute significantly to the gross world product. Ideally, their percentage of any portfolio should be much higher than most private individuals are willing to risk. They often invest only five percent of their capital in emerging markets. It would be better to see a trend of between fifteen and twenty percent.
They must be holding back out of fear of market volatility. How can Swiss investors hedge against that?
As I previously mentioned, the best way to hedge is through diversification. It's a lot more expensive when individuals try to hedge their investments by reacting to market sentiment. More often than not, their timing is all wrong. Investors with long investment time horizons are often better off being patient.
What strategy do you use personally?
I rely completely on a balanced discretionary mandate. For my children, I have invested exclusively in equity portfolios.
It is surprising to hear that you completely hand over management of your assets to someone else. You, of all people, would have the knowledge to make your own investment decisions.
Twenty years in the business have taught me that calm investing works best. That is why it also pays off to give one's asset managers a mandate allowing them free rein. As the old saying goes, "Too many cooks spoil the broth." The most important thing is a clear strategy. It can also be adapted, if need be.