Unlike the US, where investor attention is captured by the Magnificent Seven stocks, Damian Burkhardt, head of Swiss equities at EFG Asset Management, argues that “magnificence” in Switzerland is found in its small and mid-caps. This has been an outperforming asset class over the last 20 years, even surpassing the S&P 500 in Swiss Franc terms.
This strength echoes in the market. Schroders recently reported that its Swiss Small & Mid Cap Fund rose by 8.6% in the second quarter of 2025, noting that the strong performance was “well justified” given the globally diversified revenues of many companies in this segment, their proven ability to manage Swiss franc strength and only modest exposure to US tariffs. The firm added that disciplined stock selection and a focus on high-quality businesses were key contributors, and that the current environment presents a “compelling and enduring opportunity” for investors in Swiss SMIDs.
Small and medium-sized enterprises form the backbone of the Swiss economy, points out Burkhardt. Known for their agility, many are global leaders in niche areas – from medtech firms producing miniature screws that cut healthcare costs and speed recovery times, to specialist sensor technology companies. Their resilience has been proven in moments of stress, such as the Swiss Franc’s 30% surge after its euro de-pegging in January 2015, or the more recent imposition of up to 39% tariffs on Swiss exports by US president Donald Trump. Burkhardt notes that these tariffs are another test of agility, where listed SMID cap companies are well positioned. The strength of the CHF and high labour costs force them to innovate, derive pricing power and adopt local-for-local production strategies to deal with currency headwinds. These shocks, he says, force companies to innovate in order to survive, helping explain why Swiss SMIDs deliver higher return on equity compared to European peers.
This resilience is supported by Switzerland’s stability: strong institutions, a predictable political system, low taxes, macroeconomic discipline, and low unemployment and debt levels. Business-friendly regulation is another important feature of the Swiss environment. Burkhardt calls these “the perfect framework to enable companies to innovate,” particularly in contrast to other regions increasingly shaped by populism and geopolitics.
“In the case of Switzerland, it’s like a treadmill you have to get on every day to stay fit.”
The innovation flywheel
Switzerland has consistently topped global competitiveness indices, fuelled by stability, a highly skilled workforce and innovation leadership. The country has ranked first in the World Intellectual Property Organisation’s global innovation index for 14 consecutive years, and leads in patents per capita. Universities such as ETH Zurich and EPFL Lausanne produce world-class talent, while vocational training strengthens the broader workforce. This talent pool explains why Google’s largest engineering hub outside the US is in Zurich and why OpenAI recently opened a research hub there, calling Switzerland the “top tech centre and top hub for research talent.”
This is also where Switzerland differs from the US, Burkhardt argues. Former president Donald Trump wanted to devalue the dollar to revive manufacturing, whereas in Switzerland the sector has continued to expand. Today it accounts for 18% of GDP – the largest share among developed economies – despite Switzerland having had the strongest currency over the last 10, 25 and 50 years.
With manufacturing still at ~18% of GDP and exports near historic highs at ~75% of GDP, Switzerland shows that currency strength can be a spur to innovation. “In the case of Switzerland, it’s like a treadmill you have to get on every day to stay fit,” Burkhardt says. Over half of Swiss exports come from medium and high-tech industries, roughly double the US share.
“An invention isn’t an innovation unless it creates economic value. That’s why our innovation flywheel analogy combines two aspects: the value creation levers and the “value capture” levers,” he says.
Burkhardt describes an “innovation flywheel” where inventions create economic value, which is then captured through market share, talent and pricing power. He points to Nespresso capsules as an example of consumer-led innovation: convenient, high-quality and profitable, with pricing power that allowed Nestlé to charge the equivalent of $150–200 per kilo of coffee. “Our analysis of Swiss stocks over the last 30 years shows that companies investing heavily in R&D consistently outperform,” he adds, with higher revenue growth, stronger cash flows and superior shareholder returns.
Assessing these factors requires more than financial statements. “It is important to not only meet with CEOs and CFOs, but also question the respective heads of R&D,” Burkhardt explains. “How does the company manage and structure R&D to stay relevant for the future? How much revenue does it derive from new innovations? How is the innovation process organised, and what priority does innovation have in the organisation? Innovation is also about client centricity – how is client feedback incorporated into the innovation process?”
“The strength of the Swiss franc forced companies many years ago to do their homework to naturally hedge their production footprints.”
Beyond the defensive label
Burkhardt is quick to bust the myth that Swiss equities are merely defensive. That perception, he says, comes from the index heavyweights, particularly pharma, which account for nearly 40% of the benchmark but have underperformed over the last decade. “The political risks on the reduction of pharma drug prices make pharma a highly politicised sector to invest in,” he notes, adding that some large caps have been losing market share through underinvestment in innovation, reflected in weak volume growth in recent quarters and low pricing power.
Instead, he prefers idiosyncratic innovation stories that allow companies to grow above market – opportunities more readily found among small and mid-caps. EFG invests only in profitable, cash-flow generative companies and avoids early-stage biotech listings, he shares, underlining the conservative filter applied even when traditional valuation metrics fall short.
Recent economic uncertainty, including shifting US policies, is another test of resilience. Yet Swiss SMIDs are well-positioned, Burkhardt argues, having already adapted to currency headwinds through “local-for-local” production strategies. “The strength of the Swiss Franc forced companies many years ago to do their homework to naturally hedge their production footprints,” he says.
While defensive large caps dominate perceptions of Swiss equities, it is the innovative small and mid-caps that may be shaping the next generation of global leaders. For investors, recognising that innovation before it is fully priced into financial metrics could be the key to capturing long-term growth.
