Investment Ideas

Red dominant

War, inflation, coronavirus and rising interest rates all left their mark on equity markets last year. Given the array of stumbling blocks, it is hardly surprising that Switzerland’s leading index finished 2022 with significant drops in share prices. The SMI posted an overall loss of 16.1%, the sharpest decline since the financial crisis of 2008. The domestic blue chips also trailed behind their European competitors, with the DAX falling 12.3% and the EURO STOXX 50 “just” 11.3%. Nevertheless, not all 20 SMI members finished up in the red: Zurich Insurance, UBS, Novartis and Holcim actually managed to close the year with gains, contrasting with Credit Suisse, which suffered the steepest drop of 67%.

Roche: Home-grown problems

The three heavyweights Nestlé, Novartis and Roche, who together account for the great majority of the SMI’s performance, trod different paths in the last twelve months. Whereas Novartis posted increases, as already mentioned, and hence had a positive impact on the index, its competitor Roche, down 23%, fell much more than the market as a whole. The different trajectories of the two pharmaceuticals giants have thoroughly home-grown causes. Some drug flops, for instance, have led to investors being cautious about Roche, with the failure of its great hope, “Gantenerumab”, sitting particularly ill with market players. The eagerly awaited phase III study of the Alzheimer antibody fell short of its targets, pulverising the prospects of billions of euros in revenue.

Novartis: An eventful 2023

Things are going better with Novartis, on the other hand. After currency adjustments, the group is on course for growth and reckons it will hit its targets for the year, with mid-single digit percentage increases in sales and adjusted operating profit on the cards. The health specialist was also recently able to celebrate the success of a drug, when a late clinical study showed that “Iptacopan”, the experimental active agent against a specific blood disease, had lived up to hopes for phase III. Applications for licences are expected to be submitted later this year. Things are also going to get exciting for generics subsidiary Sandoz: Novartis is looking to carve out its with replica drugs business and list it on the Swiss stock exchange, the SIX. According to media reports, the ophthalmology and respiratory arm is also to be sold off in line with the reorientation to lucrative, patent-protected medicines. Bloomberg expects this process to start after the conclusion of the Sandoz transaction.

Nestlé: Medium-term growth trajectory

The share price of the third battleship in the SMI fleet, Nestlé, performed roughly in line with the overall market in 2022. The operating results of what is the world's largest food group are certainly respectable, with the management team led by CEO Mark Schneider raising its growth forecasts after the third quarter. It now expects to post an organic increase in sales for the expired financial year of between 8.0% and 8.5% compared with the roughly 8% anticipated previously. The forecast operating margin of some 17% was reaffirmed. Nestlé also presented hopeful medium-term targets: the group is expecting a sustained, organic rise in earnings in the mid-single digit range until 2025.

Graph: 2022 performance of the three SMI heavyweights

Source: Refinitiv

Product structure of the day:
Bonus certificate with coupon on SMI heavyweight trio

Start-of-year rally

The Swiss equity market welcomed the new year 2023 in a much more positive frame of mind than it ended the previous one. The leading SMI index appreciated tangibly in the first two days of trading, hurdling the psychologically important 11,000 barrier again for the first time in three weeks. The start-of-year rally was driven by hopes that inflation would weaken and enable central banks to engage a lower gear. It could be a little too early for a general all-clear, however. Latvia’s central bank boss Martins Kazaks, for instance, reckons monetary policy will initially be even more restrictive. “Currently I would see that at the February and March meetings we will have significant rate increases,” the ECB Governing Council member said to news agency Bloomberg at the start of the year.

Participation with partial protection

The uncertainties regarding interest rates, inflation, economic growth and geopolitical developments will likely dominate the new stock market year as well. Although the majority of experts are hopeful that equity markets will see a return to better times in 2023, it can't do any harm to take out some partial protection. The most popular yield optimisation products in Switzerland are barrier reverse convertibles, which are instruments that enable returns to be made on shares that are treading water. Should the markets actually head upwards in the coming months, though, this structure does not allow any participation. A remedy is provided by bonus certificates which on the one hand protect owners from losses thanks to a risk buffer, and on the other enable them to profit on a 1:1 basis from price increases above the bonus level.

Two birds with one stone

Leonteq has combined the best of both structures to design a bonus certificate with a secure coupon payment. That means investors receive a guaranteed coupon however the share prices of the underlyings perform. This comes to 4% p.a. and is distributed on a pro rata basis every three months within the 2.5-year term. The certificate participates fully when prices of the equally weighted basket of shares, which consists of Nestlé, Novartis and Roche, rise above the bonus level of 100%. There is no cap in the structure, so the upside potential is unlimited. The product is thus perfectly in keeping with the times: if the situation on the markets remains tight, the coupon payments ensure regular interest at a rate above market level. If the shares pick up again, investors enjoy the full upside benefits.

“Worst of” principle

The barrier, which is fixed at 69% of the starting values, protects investors from temporary setbacks. Should the hopes of higher shares prices be dashed, the guaranteed coupon means that the bonus certificate still comes out better than a direct investment in the trio. What is more, even if a stock falls below its barrier, this does not automatically mean a loss – in that case the classic “worst of” principle applies, and the repayment is governed by the performance of the underlying with the weakest showing. if this makes it back to at least its starting level by the end of the term, the investment can deliver a profit despite having breached the barrier. Take care, however: should the barrier be reached, investors will receive the weakest stock of the three, even if it is trading above the initial fixing at the end of the term.

Chart: Nestlé vs. Novartis vs. Roche

Source: Refinitiv

Legal Disclaimer

This document constitutes Advertising within the meaning of article 68 of the FinSA.

This publication serves only for information purposes and is not research; it constitutes neither a recommendation for the purchase of financial instruments nor an offer or an invitation for an offer. No responsibility is taken for the correctness of this information. Investors bear the full credit risk of the issuer / [guarantor] for products which are not issued as COSI® products. Before investing in derivative instruments, investors are highly recommended to ask their financial advisor for advice specifically focused on the investor´s financial situation; the information contained in this document does not substitute such advice.

This publication does not constitute a simplified prospectus pursuant to art. 5 CISA, or a listing prospectus pursuant to art. 652a or 1156 of the Swiss Code of Obligations. The relevant product documentation can be obtained directly at Leonteq Securities AG via telephone +41 (0)58 800 1111, fax +41 (0)58 800 1010, or via email termsheet@leonteq.com.

Selling restrictions apply for the EEA, Hong Kong, Singapore,the USA, US persons, and the United Kingdom (the issuance is subject to Swiss law).

The Underlying’s performance in the past does not constitute a guarantee for their future performance. The financial products' value is subject to market fluctuation, which can lead to a partial or total loss of the invested capital. The purchase of the financial products triggers costs and fees. Leonteq Securities AG and/or another related company may operate as market maker for the financial products, may trade as principal, and may conclude hedging transactions. Such activity may influence the market price, the price movement, or the liquidity of the financial products.

Insofar as this publication contains information relating to a Packaged Retail and Insurance-based Investment Product (PRIIP), a Key Information Document in accordance with Regulation (EU) No 1286/2014 (PRIIPs Regulation) is available at https://www.priipkidportal.com/

Any - including only partial - reproduction of any article or picture is solely permitted based on an authorization from Leonteq Securities AG. No responsibility is assumed in case of unsolicited delivery.

© Leonteq Securities AG 2023. All rights reserved.

Extreme movements

Meteorologists have just confirmed that the summer of 2022 was the hottest in Europe since records began. Regardless of the heat, though, in the last few months what has been called a “crypto winter” has set in. The term was first coined in 2018 when Bitcoin lost half of its value, dragging the rest of the digital coins down with it. The current bear market in cryptocurrencies is proving to be even more pronounced, however. The bedrock Bitcoin, for instance, which hit a record high of USD 68,789 just in November 2021, has since fallen below the USD 20,000 mark and is now trading lower than it has even been these last two years. Its little brother Ethereum has also had to absorb huge losses, the number two crypto having lost three quarters of the market capitalisation it had at its peak.

A new era

Nevertheless, Ethereum has since staged something of a recovery on the crypto market. In the middle of September, after years in the making, came the eagerly anticipated update called “The Merge”. This changed the mechanism from the electricity-hungry “Proof of Work” to the “Proof-of-Stake” method. “Happy merge all”, tweeted Ethereum founder Vitalik Buterin following the successful reform. According to the developers, the revamp slashes energy demand by more than 99%. That is a huge benefit, because it makes the digital currency attractive to those investors who look at sustainability criteria as well. Another positive influence on the value of Ethereum, say the experts, is the fact that the rate at which new cyber coins are issued could be sharply reduced as a result of the changeover. This anti-inflationary effect can, conversely, lead to rising share prices. There are even suggestions on the market that Ethereum’s increasing attractiveness could see it displace current industry behemoth Bitcoin from its leading position in terms of stock market value.

From crisis ...

The positive changes of direction for crypto prices in summer and then again in autumn were short-lived, however. In fact, most recently the downward trend has accelerated significantly once again, as Bitcoin, for instance, dropped by a fifth within just one week. The latest crash was triggered by the cash flow problems of cryptocurrency exchange FTX.com. The company came under pressure when customers withdraw huge quantities of capital within a very short space of time. According to media reports, the company suddenly had a shortfall of up to 8 billion US dollars. The prospects of a rescue initially seemed good, with rival Binance announcing shortly after the disaster had become public that it wanted to acquire the majority of FTX’s business. Following a comprehensive tax audit, allegations of the possible misuse of customer money and the probability of investigations by the US authorities, though, Binance pulled out.

… into insolvency

FTX ultimately had to file for insolvency, and boss Sam Bankman-Fried, who founded the company in 2019, packed his bags. That may not be the end of the story for him, though: insiders suggest that at least a billion dollars of customer money has disappeared from the company. According to Bankman-Fried, a former Wall Street banker, however, there had simply been misunderstandings in postings. While investigations for possible embezzlement are under way in the Bahamas, the world's largest payment processor, Visa, has terminated its collaboration with the insolvent crypto exchange. It could take some time until the whole truth about FTX emerges, and this will in turn further heighten the uncertainty among crypto investors in the near term. What is more, experts do not rule out the possibility that other industry giants are facing similar problems.

Chart: Bitcoin vs. Ethereum (1 year)

Source: Refinitv

Contrarian trading:

Broad crypto product range allows focused investment

For and against

“Buy when the cannons roar”, goes an often quoted stock market rule first expressed by the banker Carl Mayer von Rothschild back at the start of the 19th century. In other words, investors should go against the tide, investing when the bulk of stock market players are fleeing the trading floor in panic and prices are falling. It is precisely such panicked sell-offs that are the order of the day on the crypto market at the moment. Dogecoin, for instance, recently lost around a third of its value within the space of a single week, while Solana, regarded as the pioneer in the verification of transactions using the Proof-of-Stake method, even fell by almost a half. Although such price ups and downs highlight the fragility of the crypto market, they do not diminish the significance of digital assets. Blockchain is a mature technology on which the next stage of the internet – think web3 – is being built, among others. Indeed, central banks have already leapt onto the crypto bandwagon. According to the latest statements from ECB president Christine Lagarde, the ECB is already at a relatively advanced stage in its search for a central bank-supported digital currency.

Regulatory efforts

That cryptos remain in demand is demonstrated by a new study entitled “Crypto and Established Financial Institutions” produced by Crealogix, a Swiss fintech 100 company. This comes to the conclusion that demand for crypto services will continue to grow. Another factor in favour of the digital currencies is that – unlike the situation a couple of years ago – they have shaken off their “Wild West” status thanks to much tighter regulation. At the beginning of July, for instance, the European Union was the first major economic region to agree on regulations for cyber currencies. In light of the recent upheavals, the global Financial Stability Board (FSB) has proposed worldwide rules for cryptocurrencies. The FSB has put forward nine recommendations in total. These require cryptocurrency firms to hold capital, just like banks, when they conduct similar business to financial institutions. The new proposed regulations are to be finalised by the middle of next year before being rapidly implemented by the FSB member states. Similar noises can even be heard from the industry, too. “We do need some regulations, we do need to do this properly, we do need to do this in a stable way,” said Changpeng Zhao, the boss of cryptocurrency exchange Binance, at the G20 meeting in Bali. The industry collectively had a role to protect investors, he added.

Broad product range

Despite the progress in regulation, investors must always be aware of the risks associated with crypto assets. The opportunities are also enormous, though. Since the launch of Bitcoin in 2009, the cryptocurrency market has already survived several “crypto winters” and come through plenty of bull markets. Leonteq gives prospective buyers a broad array of options for investing in the still young sector. The universe comprises a total of 30 crypto assets in which tracker certificates enable one-to-one participation. Half of them are listed on the SIX Swiss Exchange and five on the BX Swiss, with the rest available over the counter. The market-leading product range extends from 0x through Chainlink and Polkadot to Solana and Yearn.Finance. The management fee for each certificate is 1.50% p.a.

Diversified investment

The Leonteq Crypto Index gives investors an opportunity to “kill 11 birds with one stone” or, to put it better, “buy 11 cryptos in one go”. The actively managed barometer is designed to allow in as many as 25 crypto assets. Their inclusion, though, is tied to certain selection criteria, such as sufficient fungibility, along with minimum requirements on liquidity and market capitalisation. The index is reviewed every quarter and adjusted where necessary. As already mentioned, the barometer currently consists of 11 members. These are dominated by Bitcoin and Ethereum, which together account for almost two thirds of the index's weight. The professional approach means that the management fee of 1.95% p.a. is slightly higher than that for trackers on individual cyber currencies, but these costs are actually relative modest given that this is an actively managed index. The trackers are offered in CHF, EUR and USD denominations. The comprehensive Leonteq crypto platform ultimately makes it hard to choose from the many different alternatives. In light of the considerable fluctuation on the market, however, the chosen capital commitment should always be consistent with the investor’s own risk profile and their overall portfolio.

Composition of the Leonteq Crypto Index

As at: 14.11.2022

Disclaimer:

This document constitutes Advertising within the meaning of article 68 of the FinSA.

This publication serves only for information purposes and is not research; it constitutes neither a recommendation for the purchase of financial instruments nor an offer or an invitation for an offer. No responsibility is taken for the correctness of this information. Investors bear the full credit risk of the issuer / [guarantor] for products which are not issued as COSI® products. Before investing in derivative instruments, investors are highly recommended to ask their financial advisor for advice specifically focused on the investor´s financial situation; the information contained in this document does not substitute such advice.

This publication does not constitute a simplified prospectus pursuant to art. 5 CISA, or a listing prospectus pursuant to art. 652a or 1156 of the Swiss Code of Obligations. The relevant product documentation can be obtained directly at Leonteq Securities AG via telephone +41 (0)58 800 1111, fax +41 (0)58 800 1010, or via email termsheet@leonteq.com.

Selling restrictions apply for the EEA, Hong Kong, Singapore,the USA, US persons, and the United Kingdom (the issuance is subject to Swiss law).

The Underlying’s performance in the past does not constitute a guarantee for their future performance. The financial products' value is subject to market fluctuation, which can lead to a partial or total loss of the invested capital. The purchase of the financial products triggers costs and fees. Leonteq Securities AG and/or another related company may operate as market maker for the financial products, may trade as principal, and may conclude hedging transactions. Such activity may influence the market price, the price movement, or the liquidity of the financial products.

Insofar as this publication contains information relating to a Packaged Retail and Insurance-based Investment Product (PRIIP), a Key Information Document in accordance with Regulation (EU) No 1286/2014 (PRIIPs Regulation) is available at https://www.priipkidportal.com/

Any - including only partial - reproduction of any article or picture is solely permitted based on an authorization from Leonteq Securities AG. No responsibility is assumed in case of unsolicited delivery.

© Leonteq Securities AG 2022. All rights reserved.