Swiss Small & Mid Caps: "16% profit growth expected for 2026"

Felix, the geopolitical situation is concerning, yet stock markets continue to rise. How do you explain this?

The current situation is that inflation expectations are being driven higher by the Iran conflict and the tightening oil supply. At the same time, it is expected that the Strait of Hormuz blockade will be temporary. With this perspective, markets currently assume that central banks will tend to keep interest rates stable. Nominally stable interest rates combined with higher inflation tend to reduce real interest rates. This effect directs investor funds more toward tangible assets, including the stock market, which supports prices.

Is this the case everywhere?

No, some sectors are performing well, while others are not. Parts of the economy are being supported by the increasing demand for artificial intelligence (AI) as well as the development of infrastructure for computing power. This is a significant factor, particularly in the U.S., but also for Swiss companies.

Which Swiss companies benefit from this?

Our universe is the SPI Extra Index, which covers the segment of smaller and mid-sized Swiss companies. About 12% of these companies are fundamentally AI winners. They can be divided into three types: suppliers to the semiconductor industry such as VAT, Comet, and Inficon. Companies benefiting from electrification include R&S, Accelleron, and among large companies, ABB. The third area is data center equipment: Belimo provides cooling systems, Huber+Suhner offers "Optical Circuit Switches," which redirect light waves without converting them into electrical signals in an intermediate step. AMS Osram is also working on products that make data flow in data centers more efficient.

Overall, the Mid Cap segment has struggled in recent years. What does the outlook look like?

After the COVID boom, mid-sized Swiss stocks consolidated. However, the market now expects 16% profit growth in this segment for the current year. Analysts predict a 9% increase for the Swiss market as a whole. This should give a boost to mid-sized companies' stocks, especially since their valuation is in line with the ten-year average, meaning they are not expensive.

What weighed on the profits of smaller companies in recent years? And where is the upswing expected to come from now?

After COVID and the support measures during the pandemic, the economy performed well, and valuations soared. At the same time, companies, as a reaction to the then-challenging procurement situation, built up generous inventories. However, the previously overstocked inventories of customers have now been cleared. For manufacturers, there is once again a direct correlation to actual demand. In our view, this indicates the end of the normalization phase and the beginning of new growth.

Despite the zigzag course of U.S. President Donald Trump?

Trump's tariff threats also hit smaller exporting companies harder last year than the geographically more diversified large corporations. This forced them to implement efficiency-enhancing measures, which should now take effect this year. The groundwork has been laid for 2026 to be a successful year for the mid-cap segment.

Does this apply to all companies?

Uncertainty tends to lead to postponed investment decisions. Industrial companies, particularly machinery manufacturers that offer capital-intensive goods, suffer from this—for example, Komax with its cabling machines or Bystronic, which produces sheet metal processing products.

Where do you see further risks despite the broad resilience of the stock markets?

I am skeptical about consumption. As of today, consumers are still willing to spend. However, due to inflation, prices are rising, while real wages are not, unlike during the pandemic. Companies like Lindt & Sprüngli or Nestlé could feel the impact. Similarly, Sonova or Straumann, whose products involve out-of-pocket costs, might be affected. In our opinion, investors should focus on companies that can operate independently of trade and geopolitical uncertainties or have specific drivers.

Can you name examples?

The healthcare sector is one, although tariff discussions also play a role here. Sandoz, which supplies affordable medicines like generics and biosimilars, can be highlighted positively. This aligns with the goals of U.S. President Trump's policies.

You count Swiss semiconductor suppliers among the AI winners: VAT is one of the largest holdings in the Swisscanto Strategy for Swiss Small & Mid Caps, though it is underweighted compared to the benchmark. How is this theme being played?

We often enter pair trades with similar companies to control sector exposure. So, we have an underweight where we see less potential and build overweight positions where we see the greatest opportunities. VAT gained the most value at the beginning of the upswing when it became apparent that capacity expansion for chip production was resuming: building new chip factories typically requires VAT's vacuum valves. We were involved at that stage, but now we see more potential in Inficon and Comet, where we are overweight.

In the electrification theme, the strategy's overweight is in R&S. Why?

R&S transformers are needed for electrification as part of the energy transition. At the same time, these are well-established products. However, after the IPO, market expectations rose too high, and the stock price increased too rapidly. In the summer, the new CEO, Eduardo Terzi, had to issue a profit warning, causing the stock price to drop. Since then, a bottom has been found, the valuation is moderate again, and management is working on efficiency improvements. At the current price level, confidence is growing that higher valuations will become possible again. The operational drivers are intact, especially with regard to the construction of new data centers, all of which require reliable power supply.

And what is the latest addition to the portfolio?

We have recently built a small overweight position in Sensirion. During the annual presentation, management introduced new product types that not only measure the flow of gases but also analyze their composition. These are expected to be used in three sectors: healthcare, automotive, and industry. This could herald a new growth phase. However, it is still unclear how quickly demand for these products will grow. We are now monitoring this development. Although the shares are not currently cheap, the company's operational leverage is so significant that the valuation could quickly decrease and the price potential could increase if the growth we expect materializes.

This article first appeared on the Swiss financial news site "The Market" and is republished here with kind permission and in an abridged version. The full interview can be found here (in German).