Rather unsurprisingly, they don’t like bonds, perhaps with the exception of emerging market credit, and massively eye absolute return funds to replace part of their exposure to traditional fixed income products.
Japanese equities
Faith in three arrows
Zurich’s fund selectors are way more enthusiastic about Japanese equities than their counterparts in 
any other country. Some 44% of interviewees say they will increase exposure to the asset class, almost four times the Pan-European average, while none of them intend to decrease allocation. On top of that, Zurich is the only financial centre in Europe where Japanese equities are more popular than both US and European stocks (see charts..). Moreover, recent fund flows data from the Swiss Asset Management Association SFAMA show that Zurich’s fund selector enthusiasm about Japanese equities is not a recent development. From May to July, it was the most popular equity category among Swiss investors after emerging market stocks (see chart 1).
Fund buyers in the Swiss financial capital proved confident that Prime Minister Shinzo Abe’s three arrow policy will be successful. Although a structural reform process has not really taken off and Abe’s stimulatory policies have not spurred any wage growth as of yet, all fund selectors who voiced an opinion about Japan were positive about the prospects for the country. They voiced strong confidence in both Abe and the central bank being committed to reviving Japan’s economy and moving out of deflation. Furthermore, they mentioned the strong export position of Japanese companies and their solid financial position as key incentives to step up allocation to local equities. The contrast with Geneva is huge. In the second financial hub in Switzerland, Japan bulls are nowhere to be seen.
Absolute return
A bond alternative
Absolute return is hot in Zurich. Two thirds of the interviewed fund buyers, who mainly work for private banks, said they will increase their allocation to absolute return over the next twelve months. With none of the interviewees decreasing and only 11% holding, it is by far the most popular asset class in Zurich’s investment community. The asset class was already popular in Zurich in the beginning of the year, but following an even stronger contraction of bond yields over the past few months, even more local fund selectors have started to look at absolute return products as an alternative to fixed income.
Fixed income
Low enthusiasm
Long-only and non-flexible fixed income products are indeed not too popular among Zurich’s fund selectors. While emerging market debt is seen as a viable alternative to other fixed income categories with tighter spreads in some European countries, this is not the case in Zurich. Most private banks clients are conservative and therefore do not want their money to be invested in ‘exotic’ emerging market debt, local fund selectors told our researcher. On top of that, some fund selectors said they were being put off by default talk around Argentina and, lately, Venezuela. Still, emerging credit has some fans, with a third of interviewees increasing allocation.
Emerging market equities
Focus on emerging Asia
Zurich’s fund selectors are generally upbeat about emerging market equities, which fits in well with the wider European picture. Some 44% say they will increase allocation, while none intend to cut exposure. Interviewees hailed the attractive valuations compared to US and European equities, even after recent stock market gains. Just like in most other countries, the main focus is on emerging Asia. Frontier markets are a black spot for Zurich’s fund selectors though. They and their clients find the asset class too risky and not liquid enough.
Western equities
Little interest
European and American equities are quite a different story from Japanese and emerging market stocks.
Being eurosceptics by nature, the Swiss shun exposure to European companies, only to make an exception for those with a strong presence in emerging markets. Regarding both the US and Europe, they feel uneasy about the returns on the equity markets on both continents, as stock market returns have consistently outpaced economic growth during the past couple of years. With regard to US stocks though, several fund selectors said they will probably increase exposure later, either after a short-term correction, or after an interest rate rise by the Fed.
FIDLEG and Mifid II
Regulatory headaches
Just like their counterparts in Geneva, Zurich’s fund selectors are grappling with a growing burden of stricter regulation, which will especially affect retail and private banks. They are wondering about the impact the upcoming Swiss Financial Services Act FIDLEG, which is inspired by Mifid, will have on their business. FIDLEG orders financial institutions in Switzerland to switch to an open architecture model and regulates the payment of retrocessions. FIDLEG is less comprehensive than Mifid II, as it will still allow distribution fees if financial services providers inform their clients or pass them on directly to them. FIDLEG also obliges wealth managers to test clients’ financial knowledge and to acquaint themselves with their investment goals prior to selling them any products, a standard practice in many EU countries but not yet in Switzerland.
Though Mifid II should be implemented by 2017, there is no implementation deadline set for FIDLEG yet. The country might even have to revise it, as FIDLEG might not be fully compatible with the newly adopted Mifid II Directive. Switzerland is obliged to comply with the Directive if it is to continue to enjoy unrestricted access to the EU’s financial market.
