Outside of Europe, people rarely talk about investing in the Swiss stock market.
Sure, people invest in the Swiss Franc (CHF), and open bank accounts in Switzerland, but Swiss equities are never really discussed anywhere.
But according to Franck Béon, who has worked in investment banking and in the hedge fund industry in Paris, New York, Hong Kong and Tokyo, Swiss equities can play a unique role in one’s portfolio.
I am not long Swiss equities, but I wanted to hear his thesis, and I must say that he does make a strong case.
In this interview we discuss:
– the CHF
– the Swiss National Bank’s absolutely unique policies
– Swiss equities and some of their quirks
– The taxation of Swiss equities
and a few other related topics
If you speak French, I really recommend Franck’s blog My Alternative Investor. His analyses are thorough, and target professionals in the industry.
To trade on the Swiss stock market, IB, my favourite broker, is an option.
To a World of Opportunities,
The Wandering Investor
If you want to discuss your internationalization and diversification plans, book a consulting session* or send me an email.
*a consulting session is a discussion about your portfolio and objectives. It does not constitute legal, financial, tax or investment advice.
Full transcript of “The Case for Investing in the Swiss Stock Market”
LADISLAS MAURICE: Hello, everyone. Ladislas Maurice from thewanderinginvestor.com. So today, I’m in Kyiv with Franck. Franck, how are you?
FRANCK BÉON: I’m very well, thank you very much.
LADISLAS MAURICE: So we just happened to both be in Kyiv here in Ukraine, and we decided to meet up. And Franck has an interesting blog in French, myalternativeinvestor.com. And he recently wrote in a long article analyzing Swiss equities. So it’s definitely not typically the sort of topic that I focus on, but he has a very interesting thesis on investing in Swiss equities. So before we go into this conversation, can you just give us a 10-second background on you?
FRANCK BÉON: Okay, very quickly. So I’ve been working in the financial industry, mainly in the investment banking and hedge fund business for roughly 15 years, mainly in the planning side, Maurice, everywhere in the world, in Japan, Hong Kong, New York, in Europe as well. So that’s why I’ve been very involved in all the equity trading, many equity derivatives.
Why invest in the Swiss France
LADISLAS MAURICE: We’ll be discussing a few topics, why the Swiss franc, why Swiss equities, and how to play Swiss equities. So first question for you, Franck, why invest in the Swiss franc?
FRANCK BÉON: I think the first reason will be the Swiss franc, among all the currencies you have in the world, I think probably the Swiss franc is the best one. Why, is because it has a long history of resilience. It’s probably the strongest, safest currency you might have in the world. So that’s why I think it’s wise to have part of your portfolio, part of your wealth invested in this currency. It’s kind of the gold currency among all the existing currencies.
LADISLAS MAURICE: When I look at the Swiss franc, the first thing that really comes to mind for me is the Swiss National Bank’s policies, it’s quite unique. So let’s just look at some figures here. Looking at the US, so GDP of the US 21 trillion approximately, and assets on the Fed’s balance sheet, 8 trillion. Swiss National Bank assets 1.1 trillion USD, and the GDP of Switzerland 750 billion. So we like to think that the Fed is printing, printing, printing, printing, but it would appear that the SNB is printing even more.
FRANCK BÉON: Yes. There’s a reason why. The main problematic for the SNB is to prevent its currency to appreciate too much, because that would be a bit of a problem for all the industries you have in Switzerland. So the best way the SNB has found to fight against CHF appreciation is to print as well a lot of money and then to sell those Swiss franc on the market to buy other currencies like USD, euro, and to use those new currencies to buy assets, like equities, like gold, or like bonds in the other countries. That’s why, for example, the SNB is among the biggest shareholders in the GAFAM, so Google, Amazon, Facebook, they have a big chunk of shares of those equities.
LADISLAS MAURICE: It’s like a completely unique monetary policy, if I can put it this way.
FRANCK BÉON: Exactly.
LADISLAS MAURICE: Because of the 1.1 trillion USD of assets on its balance sheet, approximately 1 trillion are in foreign assets, 66% of which are in government bonds, 11% corporate bonds, and 23% foreign equities.
FRANCK BÉON: That’s a nice portfolio. As you said, it’s three different compared to all the other countries like the US or Eurozone that printing money to distribute this money to their population. The Swiss National Bank is printing money to buy assets. So more or less it means that when you have a Swiss franc, it’s backed not only by the country, the people, the Swiss population, it’s backed also by real assets behind. So to me, that’s a real plus compared to USD and Euro, for example.
LADISLAS MAURICE: The numbers are just mind-boggling. So if you just look at foreign equities that the SNB owns on its balance sheet, it’s worth about $230 billion, and Switzerland’s GDP is approximately $750 billion. The Swiss National Bank has the equivalent of one-third of Switzerland’s GDP in foreign equities only. And that’s not taking into account corporate bonds and government bonds, etc., etc.
FRANCK BÉON: And it’s everything is public so you can easily access the list of all the stocks in which they invest in. But indeed, that’s a real plus.
LADISLAS MAURICE: When risk is on, in many ways, the SNB participates in the risk on through its equity portfolio that’s heavily US tech.
FRANCK BÉON: Yeah.
LADISLAS MAURICE: But when it’s risk off, people rush to the CHF, because it’s a safe haven.
FRANCK BÉON: Yes. But yes, that’s really a safe haven.
LADISLAS MAURICE: So what’s the potential negative scenario for the CHF?
FRANCK BÉON: To me, the negative scenario will be that the SNB cannot prevent too much appreciation of its currency that would be a real problem for all the industries based in Switzerland, because they will no longer– that would be tough for those industries to stay competitive with a very, very strong currency. Something very important to keep in mind is over the last decade, Swiss francs appreciate by 50% against Euro. It’s not nothing, 50%.
LADISLAS MAURICE: Fifty-percent, wow.
FRANCK BÉON: It’s huge.
LADISLAS MAURICE: And they’re neighboring countries.
FRANCK BÉON: And it takes time for your industry to adapt to such a big appreciation in your currency. But still, companies in Switzerland thrive or manage to adapt to this strong currency policy with innovation and very good quality of product export. That’s when you know you have a lot of companies in Switzerland, but our leaders in their field, in the sector, that’s why they can, you know, (?involve) this type of environment.
LADISLAS MAURICE: Anything the Swiss touch is just a value add.
FRANCK BÉON: When you think that way, if I tell you, this is Swiss made for you, you think, okay, it’s good quality.
LADISLAS MAURICE: Yeah.
FRANCK BÉON: On this way of thinking, it’s a legacy of more than, you know, it’s not a decade, it’s centuries of work. Swiss is democracy, maybe the best democracy we have in the world. It’s–
LADISLAS MAURICE: Maybe the only.
FRANCK BÉON: Maybe the only, yes. So that’s why all those different things make the Swiss and Switzerland a very great safe haven.
LADISLAS MAURICE: So why the Swiss franc? Why not the Singapore dollar, or are they different plays?
FRANCK BÉON: Different places. I think it’s more, once again, it’s a legacy here. I think, for centuries, Switzerland has been the main safe harbor for money. So I think you cannot tell French people, Americans, or Germans to put their money in Singapore. The fact you live next to Switzerland, for many European countries, it’s a real plus, because you can easily travel there. And we’ve seen that with the COVID, you cannot really travel easily. But still, if you are German, you can cross the border more easily than taking a plane flying to Singapore.
LADISLAS MAURICE: Fair enough.
FRANCK BÉON: Once again, Singapore is not a democracy. There’s pros and cons regarding where you want to put your money.
LADISLAS MAURICE: Yeah, that’s true. I mean, the Swiss have managed to be very rational over the centuries.
FRANCK BÉON: And stable.
LADISLAS MAURICE: Very stable, yeah. I’m actually flying to Switzerland in a few hours, not to buy Swiss equities but for other reasons. Yeah, because when you look at it, we’re talking of a country of Italians, Germans, and French, that, through two world wars between French, Italians, and Germans, managed to stay neutral and decided to get along with each other and to do business and enrich themselves. And they’ve done very well.
FRANCK BÉON: Yes, that was a big challenge. And they did it very well.
LADISLAS MAURICE: Yeah, not once, but twice.
FRANCK BÉON: They’ve been stable.
LADISLAS MAURICE: Yeah.
FRANCK BÉON: They’ve been stable. They don’t want to– they’re not interfering in other politics in other countries. They know what they’re doing. They’re managing their country, that’s it.
LADISLAS MAURICE: I would gladly become a Swiss citizen.
FRANCK BÉON: Same.
Why invest in Swiss equities?
LADISLAS MAURICE: So why Swiss equities?
FRANCK BÉON: Why Swiss equities?
LADISLAS MAURICE: Why not just buy Swiss francs and leave it on your bank account?
FRANCK BÉON: So following what we’ve said so far, you might want to have an exposure to Swiss franc. But the problem if you’re buying just Swiss franc or Swiss bonds, it costs you money, because you have a negative interest rate, because this negative rate policy helps central banks to keep the Swiss franc I will not say low but to manage the exchange rate. Because today, if you have Swiss franc in your bank account, it will cost you roughly 1%, which is expensive. Same for with bonds, you will lose money at the end because you have negative interest rate.
So the idea I’ve been pursuing writing those article was why it could be a good idea to use Swiss equities to build a kind of a proxy portfolio that could be a more or less like a bond portfolio. So the idea was, okay, how can we pick, among all the Swiss equities, the one that are doing their business in Switzerland, so their revenues will be mostly from Switzerland with lowered activity, low risk, so low beta with stable shareholders. Based on that, you can structure a portfolio that will be quite resilient and that can deliver some return and some decent return. You can say, okay, maybe up to 5% on a yearly basis, because all those stocks pay some dividends. We can help having a stable portfolio with CHF exposure with low risk profile.
And you can have also another strategy that will be to pick, among all the great equities you have in Switzerland, to pick the best one that are leaders in their sectors and invest, because you think that those companies are very good qualities. And trust me, in Switzerland, there’s a lot of such companies.
Taxation of dividends in Switzerland
LADISLAS MAURICE: So why not just get an ETF?
FRANCK BÉON: For many reasons. The first one will be dividend taxation. One thing you have to know is when you receive an ordinary dividend from a Swiss company, you will have a withholding tax. And this withholding tax is 35%, that’s the highest withholding tax in the world. And the process to get those 35% back is I will not say complicated, it’s quite cumbersome because it takes time, it’s not an automatic process, and you will have to do some administrative, you know–
LADISLAS MAURICE: Can you give us 20 seconds on this because this is actually—
FRANCK BÉON: Sure.
LADISLAS MAURICE: Because like when I read your article, I just couldn’t believe that things could be that complicated.
FRANCK BÉON: Okay. So I did the exercise for France, but obviously it might depend on the dual agreements in-between countries. So for France, if you receive a dividend from a Swiss company, you will lose, or you won’t get 100%, you will get only 65% but the taxation in France will be on 100%.
LADISLAS MAURICE: They don’t give you a credit for the 35% that you paid in Switzerland?
FRANCK BÉON: No. They will give you credit for 15% next year, that’s why you need to fill this missing 15% on your tax declaration. Then to get the 20% left back, a complicated process, because you need to get a specific documentation from your broker in three different example, then you need to go to your tax office to get a stamp, and then to send it one back to the Swiss authorities. And then, six months later, you will receive your 20% back.
LADISLAS MAURICE: Okay, so I mean, if I were to get exposure to Swiss equities, it’s probably not something that I would go overweight on, it would just be part of my risk management, it would be a small part of my portfolio. But like, I just wouldn’t want to deal with this. How can I not deal with this? Are there instruments?
FRANCK BÉON: It’s complicated, because that’s the only way to get those 100% on the dividends. It might make sense, depending how much you want to invest in Switzerland, if you invest in Swiss equities with 10k, okay, that’s not worth it. If you put something like 1 million, yes, it’s another story because it might make sense, depending how much dividend you will receive and how much you can claim for those 35% missing.
Because the problem, what I call the synthetic taxation of all the products you might have on Swiss equities, should it be ETF, should be index futures options, or investment funds, most of them won’t give you 100% of the dividends. But synthetic taxation will be close to 65. Because for institutions and banks, it’s really complicated to do some what we call in the banking industry, some yield enhancement. When I was working and working on the Swiss market when I was a trader, we had to price all the dividend at 65%. You can’t go over it.
LADISLAS MAURICE: We were talking offline about another mechanism that some Swiss companies use to pay dividend equivalents.
FRANCK BÉON: Yes. Swiss equities can pay two different types of dividends, ordinary dividends and return of capital. And return of capital are very good opportunities for investors, because you won’t get any taxation on those dividends paid out of those return of capital. So I mean, zero, no withholding tax and no taxation in your country, whatever your country is.
LADISLAS MAURICE: Do a lot of Swiss companies do this? Is it common?
FRANCK BÉON: There’s a few. I will not say most of them, I will say one-third of the company are paying you know, some of them only return of capital, some of us there’s a mix between ordinary dividends and return of capital. So some companies like Lafarge, for example, it’s 100% return of capital, some of those like Lindt, for example, it’s a mix.
LADISLAS MAURICE: Okay. So that’s all in that spreadsheet that you have prepared?
FRANCK BÉON: Yes. I’ve been analyzing 100 companies in Switzerland. So we have a quite extensive data regarding dividends activities, revenue split, different geographies, and everything to help me building the most efficient portfolio for a CHF proxy investment.
LADISLAS MAURICE: Cool. It’s in French. So if you don’t speak French, it’s a bit problematic. But if you speak French, the link is below.
FRANCK BÉON: Yeah.
LADISLAS MAURICE: And we were also discussing some of the price points on some of these shares.
FRANCK BÉON: Yes, very interesting question. When you start analyzing Swiss equities, you realize that Swiss equities are not for poor people, I will say, because many, let’s say, 25% of Swiss equities have a price of one share above 1,000 Swiss francs.
LADISLAS MAURICE: Which is over $1,000.
FRANCK BÉON: You even have some amazing companies like Lindt. I love these companies, very good company, amazing performance over the last 10 years with share price above 100,000 Swiss francs.
LADISLAS MAURICE: Can you buy fractions?
FRANCK BÉON: Yes, there’s another one at 10,000.
LADISLAS MAURICE: (laughing) Yeah.
FRANCK BÉON: It’s kind of the Berkshire Hathaway A shares of Switzerland. By the way, just to go back on the ETF question, something important to know is the concentration of Swiss equities. Because the SMI, which is the main Swiss index, are 20 stocks in this index, but roughly 60% of the market cap of this index are from three stocks only, Nestlé, Roche, and Novartis.
LADISLAS MAURICE: And that’s only probably only 5% of their income is coming from Switzerland?
FRANCK BÉON: Yes, exactly. That’s why if you want to diversify your portfolio with Swiss franc, you will have to go to other companies which a business is deeply involved in Switzerland, like could it be some real estate companies doing business in Switzerland? It would energy companies, (?) or Swisscom. Those companies that which business is just to do business in Switzerland.
LADISLAS MAURICE: Fantastic. Franck, thank you.
FRANCK BÉON: My pleasure.
LADISLAS MAURICE: So I hope you enjoyed this. So, you know, I talk a lot about emerging markets, frontier markets, etc. But obviously, it’s important not to go all in in such countries. And that’s why I like to have conversations like this, because, essentially, risk management is very important in building one’s portfolio, and Swiss equities do have an interesting story and thesis behind them. So Franck, thanks a lot for sharing.
FRANCK BÉON: My pleasure. My pleasure, Ladislas.
LADISLAS MAURICE: Franck’s blog is linked below. It’s in French, but it’s really good. There’s also a link to his massive spreadsheet with a full analysis of all, of like a hundred Swiss equities.
FRANCK BÉON: A hundred.
LADISLAS MAURICE: A hundred Swiss equities. So the link is below, also in French. And if you want to invest on the Swiss stock market, the easiest way is to open an account with IB, my affiliate link is right below. Cool.
FRANCK BÉON: Thank you very much.
LADISLAS MAURICE: Franck, thank you very much. Cheers.
FRANCK BÉON: See you soon.