Swiss small & mid caps: by no means marginal

An increase in value of 701% over somewhat more than two decades! The Swiss stock exchange's small & mid-cap segment achieved this impressive result from the beginning of 2003 to the end of February 2025 (chart 1). During this period, the SPI Extra – the index which measures the performance of all 185 names with small to medium market capitalization listed on the Swiss stock exchange, hence called Swiss small & mid caps – increased by a healthy annual average of 9.9%. This means it outperformed the Swiss stock market as a whole, represented by the Swiss Performance Index (SPI), whose average annual gain over these nearly 22 years was 7.5%.

Over the last almost six and a half years from the end of September 2018 to the end of February 2025, however, the SPI, with an annualized return of 7.5%, has outperformed the SPI Extra's plus of 3.6% by a factor of more than two.

Why is the SPI Extra lagging behind now?

The main reason for the recent period of weakness among small to medium-sized Swiss companies (SMEs) is that they are generally far more dependent on the economic cycle and the export economy than larger companies, whose shares belong to the blue-chip segment – also known as large caps – and of which the 20 largest are represented in the Swiss Market Index (SMI). These are dominated by companies from the food and pharmaceutical industries, such as Nestlé and Roche. Since their products and services are always in demand, they tend to weather economic downturns and crises well. This gives the Swiss stock market as a whole its typically defensive character.

Swiss small & mid caps: typically cyclical

Therefore, in recent years, Swiss SMEs in the small & mid-cap segment have suffered more from the events that have affected the global economy. These include the trade war between the US and China, which have imposed mutually protective tariffs on imported goods since autumn 2018; the pandemic that broke out in early 2020, which caused bottlenecks in supply chains and higher prices; the war in Ukraine, which has been ongoing since February 2022 and initially catapulted energy prices skywards and, among other things, led to a slowdown in Germany’s economy; the aggressive interest rate hikes imposed by central banks to dampen unusually high inflation; and various geopolitical tensions – which all occurred against the backdrop of increasing discord between the major powers.

Conversely, when the economy picks up again, the cyclical orientation of Swiss SMEs can give them significantly more earnings potential, and their shares can potentially experience a faster and much stronger price recovery than the totality of the companies listed on the Swiss stock exchange. After the first big drop in prices at the beginning of the pandemic, for example, the SPI Extra gained more than 55% in value between March 2020 and June 2021, significantly exceeding the 35% achieved by the SPI.

Over a long-term investment horizon, Swiss small & mid caps offer considerably more return potential than the Swiss stock market as a whole – and with less volatility. This is because investors in these stocks, which are typically less liquid, are predominantly those who keep a cool head even in the face of strong price fluctuations, as they are convinced of the quality of the underlying companies, whose forward-thinking management teams they trust.

The extent to which Swiss small & mid caps depend on the global economy can also be seen in the historical performance of the global Purchasing Managers’ Index (PMI, chart 2). After a fall in this leading indicator, which is useful for assessing the state of the economy, Swiss small & mid caps (SPI Extra) underperformed the Swiss stock market as a whole (SPI). However, if the PMI rose, the SPI Extra usually took the lead over the SPI shortly afterwards. The strong correlation evident in the chart, particularly with the European PMIs, is due to the fact that, compared to the overall Swiss stock market, the Swiss small & mid cap segment includes more companies from the industrial sector, which thus have more weight in the index. This means the industrial sector accounts for around 28% of the SPI Extra and only around 10% of the SPI.

Relief in financing costs and recovering trading partners

Switzerland managed to avoid excessive inflation in recent years, which allowed for a rapid easing of monetary policy. The Swiss National Bank (SNB) lowered its key interest rate for the first time in March 2024 to counteract the strong franc. In demand as a safe haven, the Swiss currency strengthened again in May. As a result, the SNB lowered its key interest rate again for a second time in June in order not to endanger the export economy. Lower interest rates reduce financing costs. This is particularly important for SMEs, which typically have a higher debt burden on their balance sheets, given they have less equity capital than larger companies. Lower interest rates also allow more favorable financing of future acquisitions or investments in the organic business, which could give the Swiss small & mid cap segment an additional boost over the next 12 to 18 months. Even though many Swiss SMEs have successfully traded with emerging markets over the last 10 years, their most important trading partners remain Europe, China, and the US. Therefore, the health of their economies plays a key role in determining the outlook for Swiss small & mid caps.

In the Eurozone, inflation continued to fall last year. As a result, the European Central Bank initiated its cycle of key interest rate cutting in June 2024. This gives the economy more scope for growth. Moreover, the victory of the CDU/CSU Union in the early federal elections in Germany in February 2025 could also give a positive boost to the economy of Switzerland’s northern neighbor. Leading indicators have been signaling stabilization at a low level since the end of 2024. This leaves at least a small glimmer of hope for a slow improvement in the second half of the current year, after the ongoing slowdown in gross domestic product (GDP) and the drop in PMIs to below 40. A peace agreement or even just a ceasefire between Russia and Ukraine would probably be good for Europe as a whole, as many consumers, particularly in Scandinavia but also in large parts of Eastern Europe, lost confidence due to the uncertainty over the last three years and thus spent significantly less money.

Although still fragile, China's economy has stabilized after the sharp slowdown seen in 2023 and 2024. The greatest uncertainty is currently emanating from the US in view of the punitive tariffs threatened by US President Donald Trump. This makes it extremely difficult for many Swiss SMEs to plan. If goods imported into the US are subject to tariffs of 25%, Swiss companies will also be affected. However, over the last 20 years, many smaller listed Swiss companies have significantly expanded their production facilities in the US, where they are now perceived as local partners and suppliers. In addition, many Swiss companies are in a strong negotiating position thanks to their high innovation and pricing power (see Viewpoint: US trade tariffs: an obstacle for Swiss companies?).

Despite the many geopolitical and macroeconomic uncertainties, we expect the global economy to continue its current recovery trend. This normally has a positive impact on stocks and means more of a boost for Swiss small & mid caps given their cyclical nature than for the defensively oriented Swiss stock market as a whole. In our opinion, it is only a matter of time before this upswing takes full effect and can help Swiss small & mid caps to regain their usual structural momentum. With an investment horizon of more than one year, we see attractive return potential, based on our estimates of 12-month corporate earnings growth potential (chart 3).

Now more favorably valued than the long-term average

Successful Swiss companies in the small & mid-cap segment are often valued more expensively than their peers, since they grow faster and achieve higher profit margins. Their shares usually trade at a significant valuation premium, based on the price/earnings ratio (P/E) or the price/book value ratio (P/B). Companies with such shares include drive, sensor, and valve manufacturer Belimo, specialty chemicals producer Ems-Chemie, logistics and automation solutions provider Interroll, chocolate manufacturer Lindt & Sprüngli, and vacuum pump specialist VAT.

After the correction seen on the Swiss stock market in 2022 and parts of 2023, the P/E ratio of Swiss small & mid caps is currently 20.9x, based on our estimates of corporate earnings for 2025. This represents a discount of -5% compared to the average over the past 10 years (chart 4). At the end of 2021, it was still a discount of around 35%.

Wrongly ignored

Many Swiss SMEs are leaders in their sector on the global market. On the stock market, however, they are often eclipsed by global giants such as Nestlé, Roche, or the luxury goods group Richemont. In our view, this is unjustified. They can be proud of their performance, not only based on a long-term comparison with these SPI heavyweights but also in their own right based on their corporate quality.

Reaching the top of the global market requires a strong brand, a clear long-term strategy, and competent business management. Many of our favorite Swiss SMEs can check all these boxes. Many of them are also characterized by an impressive degree of innovation, a strong balance sheet with low levels of debt, and an exemplary corporate culture that motivates the workforce – the magic formula for first-class products and services that are highly appreciated all over the world.

Thanks to these important characteristics, many Swiss companies from a wide variety of industries starting out with a low level of market capitalization have gone on to become global market leaders over the last 30 years – for example, elevator pioneer Schindler Aufzüge AG, which has existed since 1874, chocolate manufacturer Lindt & Sprüngli AG, founded in 1845, polymer manufacturer Chemie Holding Ems AG, founded in 1962, and Straumann Holding AG, which was founded in 1954 and now specializes in dental implantology.

Initially, most companies originating in Switzerland operated their business exclusively in their home market or expanded at most into neighboring countries. Their growing success encouraged them to venture out into the wider world. Often, they did more than simply build up a local sales presence, but they also brought their own production facilities closer to their customers. This strategy served them well during the disruptions in global supply chains caused by the pandemic.

Meanwhile, many companies from industrialized western countries are bringing their production facilities, which they had previously outsourced to the Far East, back to their local area. This trend, which is known as nearshoring, also offers Swiss SMEs good opportunities to gain new customers and more market share, provided they produce at competitive costs.

Proximity to the companies giving a competitive edge

All this makes Swiss small & mid caps an attractive investment segment in our opinion. They also represent an interesting niche for our investment house Vontobel. This is because there are now only a few providers remaining doing equity research for local stocks on the sell side (brokerage) – a business which has become much less profitable over the last two decades – who have been providing less research on Swiss small & mid caps since the stricter MiFID II (Markets in Financial Instruments Directive) legislation came into force.

When researching Swiss stocks, global brokerage houses primarily focus on those with the largest trading volume, i.e., the 20 SMI stocks. On the sell side, an average 25 analysts are devoted to a company included in the SMI, but only two analysts to a company included in the SPI Extra. This often results in inaccurate consensus estimates for Swiss small & mid caps, which is detrimental to market efficiency because the prices reflect this lack of information.

In-house research and active management successfully combined

As an investment house on the buy-side which operates internationally, we actively manage our portfolios based on our own fundamental analyses, valuation models, and risk systems within Conviction Equities. Our team specializing in Swiss equities has an average of over 18 years of investment experience. Three of us were previously sell-side analysts. Over the years, we have built up a strong network of contacts within our industry.

We maintain close contact with the roughly 120 Swiss SMEs that we analyze in depth. We regularly meet with representatives from their corporate management for interviews, such as the CEO and CFO as well as department heads, and we also visit their production facilities on site (see Viewpoint: Visiting businesses – corporate culture speaks volumes). To keep up to date with the latest innovations and competition, we likewise visit the major trade fairs attended by companies from the same industry. We also hold regular governance calls with all companies in which we ultimately invest, which are attended by representatives of their board of directors, usually their chairman.

With actively managed assets of around CHF 2.9 billion in Swiss small & mid caps as of the end of February 2025, we are one of the market leaders in Switzerland. This, as well as our long-term track record in this segment, prove that active portfolio management with Swiss small & mid caps can be worthwhile – provided that the meticulous quality control carried out prior to selecting stocks never becomes marginal.