Business, Capital Markets, Country, The Spectator - Thu March 17, 2016

The other side of the Alps: living and investing in Switzerland

Switzerland has always been different: something of a sovereign interloper, the guest in the corner of a party that no one remembers inviting. Live here long enough and you begin to see the contradictions at work. People with an almost pathological aversion to confrontation, yet who own more guns per person than any country bar America, Serbia and Yemen. Rural craftsmen eking out simple lives assembling Rolex watches. A love of both money and thrift. One of the world’s most advanced economies, which closes down entirely on Sundays.

Yet perhaps the most glaring paradox is the nation’s relationship with the continent around it. The Swiss never quite ‘got’ the European project. They weren’t an original signatory to the European Coal and Steel Community. Nor did they join the European Economic Community, opting instead to cut a free-trade agreement with the bloc in 1973, the year Britain joined. In 1992, a national referendum to join Norway and Iceland on the subs’ bench as members of the European Economic Area was defeated by the narrowest of margins.

Brussels prodded and prompted, but to no avail. Switzerland signed up to the Schengen Agreement (a decision that, with the advent of the migrant crisis, it now rather regrets), but never entertained the thought of swapping the Swiss franc for the euro. In another plebiscite in February 2014, the country voted to limit the number of inbound ‘migrants’, a label attached even to white-collar workers from western EU states. A UK vote in favour of Brexit would be a cue for Swiss legislators to thrash out a new deal on migrant quotas with Brussels.

To understand Switzerland’s antipathy to outsiders, you just need to glance at its history. Wave after wave of foreign antagonists, from the Hapsburgs to Napoleon to the Nazis, have invaded, occupied or stared menacingly over the mountain passes, instilling a ferocious sense of independence. It’s easy to forget this is less a country and more a hodgepodge of 26 cantons, ranging from the mighty Zurich, population just under 1.5 million, to tiny Appenzell Innerrhoden, with just 15,854 — the female half of whom only won the vote in 1991. ‘This is a country that had no capital or national parliament until 1848; federalism is deeply rooted in the Swiss mentality,’ says Diccon Bewes, British author of Swiss Watching. ‘People think of themselves as Bernese or Genevois until they go abroad, which is when they become “Swiss”.’

Over time, notes Lorne Baring — managing director of B Capital, an asset-management company in Geneva and London — the Swiss ‘carved out their own robust, successful and well-defined model of sovereignty. It’s a system based on a politically savvy electorate that is content to make their own decisions.’

Little wonder Brussels and Bern, the seat of Swiss government, never saw eye to eye. And the longer the European project staggers on, the greater the vindication felt by the citizens of Lausanne and Lucerne. ‘The average Swiss looks at Europe with horror,’ says Bewes. ‘They see no growth, huge debts, the disaster that is Greece, a crumbling currency, the north paying for a fiscally irresponsible south. And the general reaction is: we made the right decision not to join.’

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The Swiss are typically highly informed about political issues, with a robust grasp of the long-term implications of fiscal decisions. ‘Political culture holds that it’s better to devolve power to the local level,’ says Daniel Kalt, the chief economist for Switzerland at UBS. ‘That federal power plus direct democracy helps instill discipline in fiscal policy across the country.’

This kantönligeist, a word that translates directly as a ‘spirit of federalism’ and more broadly as pride in running local affairs, also imbues the country with competitive bite. ‘Cantons compete with each other to attract the best companies and the best taxpayers,’ says Kalt. By contrast, the Swiss view the EU as ‘an extension of the French obsession with centralised control, which reduces competition. That’s not what we want at all.’

But kantönligeist can only get you so far. After a blessed decade during which Switzerland benefited from a weak franc and an inflow of skilled workers (nurses from France, doctors from Germany), darkling clouds have begun to gather. Much of this is due to the perpetual weakness of the eurozone, the largest buyer of Swiss-made goods. When the Swiss National Bank unpegged the franc from the euro early last year in the run-up to the launch of European QE, the franc soared. Investors rushed to buy a currency described by Charles Sizemore of Dallas-based Sizemore Capital Management as ‘the ultimate safe haven, the ultimate hedge against volatility’. The price of Swiss goods rose sharply, hitting exporters and an already embattled tourism industry. According to the Federation of the Swiss Watch Industry — a barometer of the wider economy — exports fell 3.3 per cent year-on-year in January, the first monthly fall since 2009. Marco Estermann of SIX, the country’s leading stock exchange, expects unemployment to rise over the next few years as growth slows.

Switzerland has also faced attacks on its rigid secrecy laws, which protect investors but act as camouflage for extracurricular activities from money-laundering to tax evasion. Washington passed the Foreign Account Tax Compliance Act in 2010, expressly to prevent Americans from parking untaxed earnings offshore; the pain was felt not by Swiss banks, which continue to profit from global upheaval, but US expats. ‘The problem for a US national living in Switzerland is finding a bank willing to take them on as a client,’ says Sizemore. ‘This is really too bad, because Swiss banks… are particularly good at serving the needs of people who travel regularly or have business dealings in multiple jurisdictions.’

Yet Switzerland will survive, adapting in its adamantine way to the lurching and listing of the outside world. Major industrial firms will move more production to eastern Europe and Asia to trim costs, while keeping their board and executives firmly planted on Swiss soil. ‘There are around 2,000 global corporates headquartered here, not just letterbox companies but real structures,’ notes Estermann. They come for the low tax rates,and stay for the high quality of life. Glencore, the FTSE-listed but Baar-based global commodity giant, springs to mind. Nor is the nation’s reputation for money-management likely to come under threat, despite negative yields on Swiss government bonds, low returns on other domestic financial instruments and a slowdown of the local property market. Buying a Swiss chalet was ‘a real money-maker over the past decade,’ says Baring. ‘That moment has now passed.’

But good investment opportunities remain. Estermann points to the host of leading Zurich-listed multi-nationals, from GPS chip-maker U-blox to specialty chemicals firms Syngenta, EMS-Chemie and Clariant, plus industrial giants ABB and Schindler. Sizemore notes that the iShares SMI, an exchange-traded fund that gives investors access to a weighted basket of the largest Swiss stocks, is on track to deliver dividend income of around 4 per cent in 2016.

Then there are the likes of food giant Nestlé and drug makers Novartis and Roche, corporate rocks on which the Swiss economy is built. ‘You really can’t lose with Nestlé,’ says Sizemore. ‘It will still be around in a hundred years’ time, making stuff you need to replace on a daily basis. Who knows if Google will still be around then, but you can be pretty sure that your grandchildren will still be eating chocolate and drinking bottled water.’ He adds that for all their recent woes, Switzerland’s big banks, Credit Suisse and UBS, are trading at valuations ‘that would have seemed crazy pre-financial crisis. They are a decent buying option down the line.’

But perhaps the best reason to invest here right now is that Switzerland is a great environment for bear investors. ‘If you see the world as a bad place that will get worse, having a Swiss bank account is a great move,’ says Baring. ‘Around 35 per cent of clients are UK-based non-doms, so they need to put their money to work in a safe place that’s outside but not far from Britain, and a place that is in Europe but not part of the EU. Switzerland fits the bill perfectly.’

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