Zürich is so quaint that it almost looks surreal. Stand in its center, with its picture-postcard, low-rise buildings behind you, Lake Zürich ahead of you and the snow-capped peaks of the Alps visible in the distance, and it feels as if you’re part of an idyllic, digitally-enhanced photograph, rather than the third largest equity target city in Europe.
Zürich is not a capital city. Its population numbers only a third of a million. It has little of the political and diplomatic clout of Switzerland’s federal capital, Bern. Yet the city has carved a niche for itself as one of the world’s primary investment centers, with 132 investment institutions and some $413 bn in institutional equity holdings ‘Zürich has a different pace to the rest of Switzerland,’ says Jean-Marc Hensch, international president of Zürich-based Farner PR and Consulting. ‘It may not be the focal point politically, but it certainly is economically.’
Indeed, in stark contrast to its relatively tranquil atmosphere, Zürich has become a hot bed of equity investment. And it’s the behavior of investors that has really spurred things along. ‘There’s a growing need for pension funds to invest in shares,’ says Hensch. ‘When it comes to selecting bonds versus equities, the rules have recently changed.’
‘There has been a change in the legal framework,’ explains Dr Udo von Werne, VP of Pictet Asset Management. ‘There is now less regulation over asset allocation. We can use the prudent man test. That has allowed us to invest more in equities.’
Equity lovers
And it’s not just the professional investor that has latched onto equities. Unlike neighboring France and Germany – whose citizens have been slow to plow their savings into stocks – Switzerland has one of the most vibrant retail investment communities in the world. ‘Around 31 percent of the Swiss population are direct shareholders,’ says Robert Wyss, vice president of SWX, the Swiss stock exchange, and head of SWX New Market. ‘That means we’re number three in the world.’
Of course, last year’s slump in tech stocks and Europe’s new markets has exploded the myth that equity investment is a road to free money. Indeed, Gabriel Herrera of UBS Asset Management suggests that Zürich’s retail investors have been particularly affected by that decline due to the sectors they favored. ‘A year ago, retail investors had a tremendous interest in biotech and technology,’ he says, before adding, ‘Now there is still some interest, but much less.’
Hensch has also noticed a reduction in the number of companies coming to market. Is the IPO pipeline running dry? ‘Companies won’t leave if they’re in the market already but they won’t touch it if they’re not there yet,’ he says. ‘A lot of IPOs have been postponed – which probably means they are gone forever.’
‘Last year we had hoped to reach 20 listings on the New Market but didn’t,’ admits Wyss. ‘We do hope to get another ten this year however. But it isn’t really the numbers that count; it’s the quality.’ At such a time, Wyss argues that the conduct of SWX is crucial. ‘We offer support to issuers which makes investors more confident and boosts liquidity,’ he says.
But there is still a retail investment market, von Werne argues, intimating that last year’s troubles were simply a case of natural selection. ‘Sophisticated investors knew that the high-tech bubble would burst so they didn’t hold too much,’ he recalls. ‘I think it was something of a wake-up call for the over-optimists.’
Nonetheless, Zürich still has a rich vein of private investment. Why has the Swiss public become so involved in this ripe equity culture? ‘For a start, there have been some large privatizations, such as that of Swiss Life,’ offers SWX’s Wyss. ‘The result is that their clients then become shareholders. Also, private investors in Switzerland are easily able to inform themselves. Very often, the coverage is better outside of a big market.’
Big news
Zürich’s financial media coverage is improving. The key financial journal is Neue Zürcher Zeitung, similar in stature to the Financial Times in the UK. But, overall, financial coverage is impressive. ‘There is a lot of media coverage in Switzerland compared to other countries,’ opines Hensch. ‘Many papers actually start with stories that are about the stock exchange in some way – even regional papers. Other countries are very self-centered but we focus on exchanges of other countries.’
For the investors, that is good news. ‘There’s plenty of information on small companies,’ states Herrera. ‘There’s more press coverage and more analyst coverage. But for the companies that is both good and bad.’
That much is certain. As well as the boost in profile, of course, companies will have to contend with intense scrutiny. Perhaps this is why the level of transparency and disclosure in Zürich is relatively high.
‘Historically there has been a backlog when it comes to the public being informed of company data,’ says Hensch. ‘But now that has changed. Companies are reporting in IAS or US Gaap standards and the rules of the Zürich exchange are now at international levels.’
With this level of clarity, Zürich-based investors seem less likely to be swayed by hype. Indeed, both von Werne and Herrera state that institutional investors are fundamentally driven. Herrera describes them as ‘long-term, solid investors’.
This strategy can manifest itself as staid conservatism. Wyss certainly believes that this is fair comment: ‘Zürich’s investment community has traditionally invested in blue chips,’ he remarks. Yet, Farner’s Hensch argues that this mindset is not too deeply ingrained. ‘Traditionally, Zürich has had a conservative, risk averse approach,’ he agrees. ‘But that is rapidly changing.’
Indeed, Pictet’s von Werne believes that the autonomy afforded to individual asset managers is leading to a more innovative approach to investment. ‘Each portfolio manager has the discretion to form an independent view, to condense and review information in different contexts and to generate his own ideas,’ he says. ‘In terms of stock selection, there has been a clear shift from a national to a sectoral approach. And there is a bias toward pharmaceuticals and financials.’
Big on biotechs
Wyss has certainly noticed a sectoral bias, particularly in the New Market. ‘The market has a life sciences focus,’ he says, before adding, ‘I do think life science is much more mature than IT.’
He claims that this leaning is down to a strategic plan to give the market a firmer focus. As Hensch says, ‘Small financial centers like Zürich just need to find different areas and segments where they can develop a competitive edge. Most countries have a defining stock. The Nordic countries, for example, have telecommunications in the form of Ericsson and Nokia. I think Zürich has that in the biotech sector. The investment community is used to biotechnology. People will start to see it as a biotech center.’
On the other hand, he says, ‘[Attracting investment in Zürich] might be difficult for companies from other sectors, such as retail – the big retailers in Switzerland aren’t companies whose shares can be bought. They’re co-operatives or privately owned. So there isn’t a tradition of investment in that sector – it isn’t a place for big retailers.’
What is really striking about the city’s investment community is not its biotech bias, but it’s outward-looking, internationalist stance. Zürich is already well-known for its cosmopolitan make-up – over 20 percent of the population is made up of immigrants – and as von Werne remarks, ‘The city has a very international atmosphere. In a restaurant you can hear people from many different countries.’
It seems this openness has spilled into the realm of investment. And, of course, that bodes well for companies that have been hoping to tap into the city’s wealth of capital. ‘Over the long term, there has been an increase in investment in international equity,’ declares von Werne, ‘because people have realized it is beneficial in terms of both risk and return.’
Herrera regards this as particularly significant given the attitude toward foreign stocks that had existed previously. ‘Institutions started from a low base,’ he says. ‘They would have held under 10 percent of their assets in foreign equity. Now that figure is around 15-20 percent.’
Again, Herrera believes that this mindset has extended to the wider investment community, too. And this has accelerated the trend toward global equity holdings: ‘Investors are starting to think, Why should I invest more in Novartis than I do in the whole of the Japanese market?’
Not everyone is convinced that national boundaries have been rubbed out completely, though. ‘There is definitely a certain domestic bias,’ opines von Werne, ‘but it is shrinking. The Swiss investor is becoming truly international.’
Wyss agrees that Zürich’s investment community embodies an international spirit, arguing that ‘Italy, France and Germany are far more insular.’ And he has an idea as to why Swiss institutions invest internationally: ‘In the past, Switzerland has had low inflation, as well as social, economic and political stability,’ he states. ‘Therefore, people bring money into Switzerland, and that has to be invested internationally.’
Quoting foreigners
Zürich’s stock exchange is aware of this trait and is shaping itself accordingly. ‘We want to fill up [the New Market] with foreign companies, not just because we need more companies, but because Swiss investors are very open,’ says Wyss. ‘Already, seven out of the 17 companies on our New Market are foreign companies.’
According to Hensch, the fact that issuers on SWX have an international presence reinforces Zürich’s position as an international financial center. ‘Companies quoted on the SWX are more international on average,’ he says. ‘In the US, on the Nasdaq Stock Market for example, 95 percent of the companies won’t have been heard of outside of the US. There’s a broad range in Zürich, and the companies have a broad base outside of Switzerland.’
But this is all part of the evolution of a global market. As Hensch says, ‘Historically, Switzerland has had a lot of geographical markers which have defined our position. Now in this age of globalization, you define yourself by other means. We’re now in a global community. In many ways, you can be closer to people in New York and London than you are to someone 30 km away. People will group in occupational entities.’
And so, heartened by the news that Zürich is open to the idea of cross-border investment, foreign companies should certainly consider the city for a roadshow stop. If nothing else, Wyss maintains that Zürich’s concentration of institutional investors will help companies to blitz the Swiss investment community. ‘Foreign companies can really focus on Zürich,’ he claims. ‘You can visit a lot of investors in the city. This basis helps to keep investors well-informed.’
Once there, however, what are the characteristics of which presenting companies should be mindful? Primarily, Hensch warns that investors may appear to be a little reticent. ‘I think London is more aggressive,’ he asserts. ‘In Zürich, fund managers and analysts tend to sit back and listen and maybe ask questions a day later. In Zürich, the important thing is that you have to bring the information to them. In England, you expect investors to understand and to say if they don’t. But some countries are too polite to say. In Zürich, if they’re not yelling, it doesn’t necessarily mean things are fine – they won’t say if they’re unhappy with what you’re saying, unless it is a major issue.’ To that end, Hensch advises that companies prepare a good presentation in advance.
In terms of time planning, there is no reason why company executives cannot meet with investors at the beginning of the working day. ‘In Zürich, people start early,’ says Hensch, ‘so breakfast meetings are an option. But I think lunch meetings are more common.’
Crucially, the CFO and CEO should present the company’s message. ‘Only the few biggest companies have an IRO who would be accepted as a full-fledged spokesman,’ states Hensch. ‘In fact, most companies have no IRO at the senior level – because companies are usually smaller. The IRO just isn’t considered good enough.’
And, as for the message, Herrera thinks that investors are looking for nothing out of the ordinary: ‘My impression is that the important things are the credibility of the company’s strategy, the management, transparency and honesty.’
