SWITZERLAND: An Introduction to Capital Markets
Capital Markets in Switzerland: an Introduction
The main market challenges of 2022 also set the tone in 2023. Developments unfavourably affecting capital markets included the ongoing war in Ukraine, the conflicts in the Middle East, rising geopolitical tensions between the USA and China in particular, the instability of financial institutions (eg, the acquisition of First Republic Bank by JP Morgan Chase in the USA, or the government-brokered acquisition of Credit Suisse by UBS in Switzerland), high levels of inflation, and continuing worldwide supply chain disruptions including as a consequence of measures taken in previous years to restrain the spread of COVID-19. Central banks of all large economies continued to increase interest rates in order to fight inflation, which in Switzerland resulted in positive interest rates for the first time since 2015 and the highest interest rates since the financial crisis in 2008. By the end of the third quarter of 2023, IPO activity on a global scale dipped by 32% to 968 IPOs in 2023, compared to the already low numbers in 2022. In Europe, the number of IPOs fell by 48% to 78. The number of IPOs in the USA slightly increased from 90 in 2022 to 100 in 2023, which is still significantly below the record number of 416 in 2021.
Against this continuing lacklustre background worldwide, Switzerland – as a listing venue – was still able to attract new corporates and investors. There were eight new companies listed on the SIX Swiss Exchange, raising aggregate proceeds of USD2.3 billion. This number does not take into account the spin-off of Sandoz Group AG, since this was a transaction by way of a dividend-in-kind distribution.
Indeed, the spin-off of the generic pharmaceuticals and biosimilars subsidiary Sandoz Group AG by Novartis AG was the only IPO of a domestic company in 2023 in Switzerland. The listing of Sandoz Group AG resulted in Novartis shareholders receiving one Sandoz share for every five Novartis shares held by way of a dividend-in-kind distribution. The shares of Sandoz Group AG were listed on the SIX Swiss Exchange on 4 October 2023, with a market capitalisation of CHF10.5 billion (based on the first closing price).
The following Chinese-based companies are newly listed on the SIX Swiss Exchange through GDRs as part of China–Switzerland Stock Connect:
• Will Semiconductor Co., Ltd., with USD444.9 million raised;
• Zhejiang Huayou Cobalt Co., Ltd., with USD582.5 million raised;
• Kunshan Dongwei Technology Co., Ltd., with USD104.8 million raised;
• Yangzhou Yangjie Electronic Technology Co., Ltd., with USD215.1 million raised;
• Zhejiang Supcon Technology Co., Ltd., with USD 564.6 million raised;
• Fangda Carbon New Material Co., with USD189.9 million raised; and
• Zhejiang HangKe Technology Incorporated Company, with USD172.9 million raised.
Significant developments in Switzerland in 2023
China–Switzerland Stock Connect
In July 2022, SIX had launched the new China–Switzerland Stock Connect programme, which allows Chinese companies to access the Swiss capital market and, in turn, Swiss companies can gain access to the Chinese capital market. This cross-border IPO and/or secondary listing programme operates through the issuing and listing of GDRs, which are tradable financial instruments issued by a depositary bank. They represent shares in foreign equity securities that are segregated and deposited in the home country (ie, either Switzerland or China). The China–Switzerland Stock Connect enabled Switzerland to become a top destination for cross-border IPOs. In 2023, a total of seven companies successfully IPOed at SIX Swiss Exchange through the issuance of GDRs (compared to nine in the previous year).
Raise of interest rates
The Swiss National Bank raised its policy interest rate in several steps during both 2022 and 2023 as a measure against inflation rising to a level not seen since 2008. As a consequence, equity was no longer unchallenged as an asset class and other instruments (eg, bonds) became increasingly popular. The inflation level in Switzerland (and elsewhere in key economies around the world) is likely to remain above long-time averages for some time, and, thus, interest rates are unlikely to fall until the end of 2024 or even 2025, if at all. “Higher for longer” seems to be the name of the game for the immediately foreseeable future.
Sparks SME Stock Exchange
Following the conclusion of the second edition of the Sparks IPO Academy in May 2023, its third edition was launched in October 2023, welcoming 16 companies from a range of diverse sectors, such as life sciences, greentech, fintech, logistics, industrial and ICT, and giving them an opportunity to connect and network with some of Switzerland's leading capital market experts, CFOs of companies listed on the SIX Swiss Exchange, selected small and mid-cap investors and their peers. SMEs, financial and legal advisers, financial media and other capital market participants have all shown a strong interest in this segment. The IPO of Xlife Sciences in February 2022 with a market capitalisation of CHF254 million at the time of listing – the first listing in the Sparks SME Stock Exchange – showcased the potential for future listings in this segment for SMEs and investors alike.
ESG reporting
The new Swiss Corporate Law reform that entered into force on 1 January 2023 introduced new ESG reporting requirements. With the adoption of the Ordinance on Climate Disclosures by the Swiss Federal Council from 2024, new regulations regarding reporting on non-financial matters will apply to companies, requiring them to report on climate issues. ESG criteria are also beginning to be included in investment advice. ESG matters are expected to become an increasingly significant investment criterion for companies and investors alike.
Outlook and trends for 2024
2023, along with 2022, was one of the most challenging years for investors and companies since the global financial crisis in 2008. It is hoped that 2024 will prove a turning point towards a better future for capital markets. Looking ahead, the following trends may be crucial for the Swiss capital markets in 2024.
Lasting vulnerability
The main challenges faced in 2023 – in particular, supply chain insecurities, the ongoing war in Ukraine, the conflicts in the Middle East and other geopolitical tensions, and high rates of inflation – are likely to remain in 2024. Based on the effects of the initial interventions by central banks in various economies, decreasing (albeit historically still too high) levels of inflation and solid US employment data, there is hope that monetary policy will manage to avoid a recession that would impact capital markets as a whole. Tamed inflation would mean that investors could regain confidence, thereby creating a favourable environment for capital market transactions. However, inflation seems to have come to stay.
Quality in uncertain times
The development of the capital markets in 2024 will most likely be determined by geopolitical events. With the war in Ukraine, the conflicts in the Middle East and other growing geopolitical tensions (in particular between the USA and China) continuing to be unpredictable factors, and faced with tighter liquidity and a higher cost of capital due to monetary policies, investors will be looking for quality, stability and growth. It is likely that companies with strong financials and valuations will remain predominant players in the market. It will be interesting to see how new companies manage to make their way onto the stock market and gain the confidence of investors.
Special purpose acquisition companies (SPACs)
By the end of the third quarter in 2023, only 22 SPACs were able to complete their IPOs in the USA – a 74% decrease from the likewise low number of 2022. It will be interesting to see how SPAC IPOs evolve in the coming year. The three-year window to find a target company pursuant to Swiss law might be a blocker to potential SPACs as, in the current market conditions, one might want to be cautions to not find oneself in a situation where, without a target to merge with, funds would have to be returned to investors. Indeed, pressure to find a target to merge with might result in rushed mergers. It is, however, possible that SPACs will seize the momentum and be present for investors if capital market transactions pick up in 2024. For example, in October 2023, VT5 (the first and currently only SPAC listed on SIX Swiss Exchange) announced that it had found a suitable candidate and entered into exclusive negotiations regarding a possible merger.