‘ON Holding stands proud amongst the stars of the sector, Nike and Adidas’

This article was written by Daniel Steck, Analyst and Fund Manager. It appeared in Sphere on May 24^th 2024.

What is the current state of valuations for Swiss small and mid caps?

Today, Swiss small and mid caps are particularly attractive investments, especially when compared with the rest of the stock market. Historically, in Switzerland, small caps have traded at a premium to large caps. This premium, which averaged 30%, is currently just 16%, even though the growth prospects for these companies are generally better than those of their larger peers. The rise in interest rates, which has considerably tightened financing conditions for these companies, and the persistent strength of the Swiss franc in recent quarters have weighed heavily on their valuations. However, a turnaround is underway, particularly following the easing of the SNB's monetary policy.

What can they expect from the SNB's recent measures to weaken the Swiss franc?

Small and mid-caps are the first to benefit from the SNB's recent decision to cut its key interest rates. The strength of the Swiss franc is particularly damaging for these companies. Unlike large multinationals, which have a physical presence on several continents, small companies generate a large proportion of their costs in Switzerland, while exporting the majority of their goods and services internationally. The result is a significant negative impact on their margins, to which must be added a loss of competitiveness in relation to foreign companies. The current weakness of the Swiss franc against the euro and the dollar is therefore excellent news for this market segment.

Which companies in the Small & Mid segment are the most successful in exporting?

Despite their small size, many Swiss companies excel internationally. They benefit from a brand image that is recognised the world over. Lindt and Logitech, for example, generate only a tiny fraction of their revenues in Switzerland. The healthcare sector also boasts a number of companies with a resolutely international outlook, such as Straumann, Bachem, Ypsomed and Tecan.

Which Small & Mid Caps companies are of the greatest interest to you?

ON Holding is a real case of David battling against several Goliaths. It's a remarkable success story in the sports footwear sector. With a market capitalisation of just under 12 billion dollars, the company, which floated on the stock exchange in 2021, stands proud against the stars of the sector, Nike and Adidas. In terms of its fundamentals, ON Holding has nothing to envy of the market leaders, since the company already boasts a profitability significantly higher than that of its competitors, thanks to its resolutely upmarket positioning. ON has succeeded in differentiating itself in a sluggish sports footwear market and in capitalising on the image of a well-known figure, Roger Federer. A clear sign of its ambitions, ON Holding chose New York as the venue for its IPO three years ago.

Are any of these Small & Mid Caps cut out to join the SMI one day?

There is every chance that the next company to join the SMI index will once again be a healthcare company. The leading candidate is of course Straumann, the largest capitalisation in the SPI Extra index, which includes SPI stocks excluding those in the SMI. However, a newcomer could take the upper hand. Sandoz, the world leader in generic medicines, which completed its IPO less than a year ago, looks well placed to claim a place amongst the twenty stars of the Swiss stock market.