The decision made by the Bank of Japan last Friday had a significantly more limited impact compared to the one in late July, which triggered a 12% stock market correction. Indeed, not only did the central bank raise its key interest rate by 25 basis points to 0.5%—a 17-year high, now aligned with Switzerland’s benchmark rate—but the accompanying statement reflected marked optimism regarding the resilience of the economy and its ability to withstand further rate hikes. Thus, despite a period of adjustment observed in recent months, the Japanese market exhibits factors likely to reignite investor interest. Progress in corporate governance has exceeded expectations, particularly in terms of share buyback programs. Furthermore, the structural return of inflation presents an encouraging signal: for more than 30 consecutive months, inflation has exceeded the Bank of Japan’s 2% target, fueling positive momentum in wage growth. These factors, combined with more attractive valuations, could create opportunities in Japanese equities. These observations have led us to adopt a neutral allocation stance on the Japanese market.
2024 marked the second consecutive year of underperformance for Swiss equity markets. Several factors, including reduced investor risk appetite, the rapid rise of artificial intelligence—a sector underrepresented in the Swiss market—and challenges specific to the index heavyweights, have significantly hindered the progress of local indices. This lagging performance has resulted in a historic valuation discount for Swiss equities relative to global indices. The valuation gap has never been so favorable, making Swiss companies particularly attractive compared to other regions.
Despite the underperformance, the financial fundamentals of Swiss companies remain robust. Both small and medium-sized enterprises (SMEs) and the blue chips within the SMI boast record-high operating margins, while profit growth expectations exhibit exceptional stability. Furthermore, the competitiveness of Swiss products and services has seen marginal improvement in 2024, driven by the stability of the Swiss franc and a favorable inflation differential benefiting Swiss companies.
The attractiveness of Swiss equities is hard to overlook as we enter 2025. Following the significant monetary policy easing by the Swiss National Bank (SNB), investment alternatives for yield-seeking investors have diminished, leaving equities as the most compelling option.
Consequently, we maintain an overweight position in Swiss equities in our investment portfolios. A performance rebound appears likely in 2025, particularly as we expect improved earnings growth prospects for the largest defensive players. While a meaningful allocation to small-cap cyclicals remains justified in light of the broad-based easing of financial conditions, it is equally important to recognize the potential in stocks that have been key contributors to the underperformance of the past two years. These stocks now trade at extraordinarily low valuations, presenting significant upside potential.
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