Zurich’s financial stocks have declined considerably versus Basel-based pharmaceutical and chemical stocks. The conditions for Switzerland’s growth in the next thirty years won’t be those that prevailed in the last three decades.
The Swiss economy has always adapted to global changes. Growth has come from international banking, concentrated in Zurich, and from world-class pharmaceutical companies, mostly based in Basel. The Swiss Market Index (SMI) has reflected the importance of those two poles of prosperity, which rested on a particular blend of regulatory conditions such as neutrality and banking secrecy, and excellent training and know-how.
However, being highly exposed to the international context, Swiss growth has seen some major upheavals that led to a gradual decline of Zurich and a simultaneous rise of Basel.
Zurich-based finance suffered a first shock twenty years ago, after the popping of the dotcom bubble; the sector lost some weight in the SMI, while Basel-based healthcare groups took more space in the blue-chip index. Financials from Zurich saw their weight in the SMI slide from 30% to 21%, bringing them close to their 1992 weight (19,8%). The weight of Basel, on the other hand, essentially pharma and chemicals stocks, jumped in 2002 from 42% to 50%.
Then, after the global financial crisis of 2008, another decline in financials gave yet more weight to the health care sector. A period of banking euphoria had led financial stocks to their peak within the SMI, with UBS reaching almost three times its current value, at CHF 160bn in 2006, and putting Zurich at the center of Swiss growth. That was before the calamity of 2008.
And again since 2017, with the boom of cryptos, the exit of Julius Bär from the SMI, the issues at Credit Suisse, and – after 2020 – the positive effects of Covid drugs on pharma stocks, the gap has widened further. Today, irrespective of the sector, all blue chips based in Zurich represent only 13% of the SMI. Basel-based groups weigh roughly 40% of the SMI.
In terms of sectors, irrespective of the location, Swiss pharma stocks have surpassed financial stocks not only because the former are defensive and the latter are cyclical, but because pharma is benefitting from a secular growth trend related to world demographics, while banks are in a secular downtrend related to challenging technological evolutions.
Valuations of Swiss pharmaceutical and chemical stocks have been expanding within the SMI over the decades, growing their SMI weight from 36% at the end of 2001, to 41% in 2017, to 46% today. On the other hand, financials in the SMI have been shrinking, from 35% at end of 2001, to 22% in 2017, to only 14,8% in 2022.
That is in great part due to the Credit Suisse share drop of over 92% from its value over 15 years (and UBS lost almost 80%). We now find only two financials in the top ten of SMI stocks, Zurich and UBS.
A look at the SMI offers valuable information about what primarily drives the Swiss economy. Today investors have voted that it is food, drugs and chemicals that largely dominate and thrive most as world champions. The retrenchment of financials reflects how wealth management margins were divided by two or three after the end of international banking secrecy; the difficulty in entering the US corporate finance and investment banking market; but also the challenges for trade finance in global commodity trading and the end of banking neutrality in the context of war.
The valuation shortfall is also testament to how fintech proves to be a global game in which Silicon Valley and China are best positioned.
One thing is certain: The factors that drove Switzerland’s growth in the last three decades won’t be those that will drive its future growth.