Swiss stocks: mountain pique
If Switzerland can withstand Brussels’ skewering, the London market has less to fear
Skirmishes have broken out over the Alps. Plucky Switzerland refuses to accept closer trading arrangements with the EU. Brexit has increased the bloc’s belligerence. Within days, Brussels could isolate Swiss stock exchanges from the rest of the continent. Retaliation against the small Alpine country would set a worrying precedent for the UK. Investors in Swiss and UK stocks need not head for the mountains, however.
Switzerland has long resisted EU membership. It nevertheless headquarters three of Europe’s 10 most traded stocks: Nestlé, Novartis and Roche. Overall, Swiss equities have outperformed over the past year, rising almost a fifth compared with a flat MSCI Europe index. Food and pharmaceuticals weather global economic turbulence better than banks or automotive stocks.
Withdrawal of stock market “equivalence” at the end of June would complicate EU traders’ access to Swiss shares. In theory, market liquidity could drop, diminishing Swiss companies’ attractiveness. But any impact was hard to spot this week. The Swiss SMI index edged higher. Spreads did not widen.
One explanation is that Bern has prepared counter measures. A third of trading in Swiss stocks is outside Switzerland. If Brussels withdrew equivalence, EU venues would be banned from trading Swiss shares. Business would return to Zurich, deepening markets there and protecting the Swiss financial sector.
If Switzerland can withstand Brussels’ skewering, the much larger London market has less to fear. The continent relies on the depth of its capital markets. Economic damage caused by a chaotic Brexit would be a much bigger worry. Still, investors suffer long term when markets fragment and barriers are erected. Europe’s financial unification has been slow, but mostly one way. Switzerland could begin an unwelcome reversal.