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
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