A risk for Swiss savers

Nestlé has fallen from grace. Last week, Morgan Stanley downgraded the shares of the world’s largest food company. From the perspective of American financial professionals, this means that investors should now “underweight” them in their portfolios, i.e. sell holdings. UBS also recently withdrew its buy recommendation.

These demotions come just three weeks after Laurent Freixe, the new CEO, took office. He is supposed to bring about a turnaround at Nestlé. The successor to the deposed Mark Schneider has apparently not yet been able to convince investors of his vision. As he made clear in his first appearances, the Nestlé veteran has committed to a “back to the past” strategy: focusing on tried-and-tested food products and brands, fewer experiments.

This hasn’t gone down well so far. Nestlé shares continue to lose value, down more than 14 percent since the beginning of the year. In the last twelve months, Nestlé was the second worst-performing Swiss blue-chip stock. The average price target expected by analysts is below 100 francs – 30 percent lower than the peak in September 2021.

High concentration in the SMI

Nestlé has long been the epitome of the “Swiss quality stock”. But there isn’t much of this splendor left, although the group continues to operate profitably and reliably pays dividends. Nestlé shares are now considered less promising than the securities of foreign competitors such as Danone, Unilever or Mondelez.

But the form crisis doesn’t just affect shareholders. With a market value of around 220 billion francs, Nestlé is still just about the most valuable listed company in Switzerland. But it could soon be replaced by the pharmaceutical giant Novartis, which currently weighs almost as much. In the SMI, Nestlé has a weight of around 17 percent. Novartis and Roche account for almost 16 and 15 percent respectively.

This high concentration is problematic because the three stocks make up almost half of the total index weight. “In certain phases this can be disastrous for investors, for example if, as is currently the case with Nestlé and Roche, things are not going well at the same time,” says Björn Eberhardt, head of the Investment Office at Luzerner Kantonalbank.

In small countries, a high concentration is not unusual. The Danish stock exchange is dominated by the pharmaceutical company Novo Nordisk, the Taiwanese stock exchange by the chip manufacturer TSMC. But these national champions have helped stock markets in Copenhagen and Taipei soar this year.

Largest position in 3a funds

In contrast, Nestlé and Roche were a brake on the Swiss stock exchange: with an advance of less than 10 percent, the SMI is one of the stock exchanges with the weakest performance in Europe this year. For comparison: the Spanish index gained 18 percent, the DAX 16, only the French CAC 40 lags behind the SMI. No European index can compete with the US stock exchanges this year.

Nestlé’s poor performance is not only a nuisance for the owners of the food multinational, but also for indirect shareholders who hold index products on the SMI. This means that many savers are also affected, especially in private provision. Nestlé is one of the three largest positions in many pillar 3a products: for example in the popular Mixta funds from CS, in the UBS Vitainvest range or in funds from the ZKB digital offering Frankly.

These funds, some of which are actively managed, are often invested along the SMI reference index. Since this is dominated by Nestlé, Novartis and Roche, there is no escape: “This is a risk, especially for investors in index products. “Particularly if the prospects of the index heavyweights are not particularly encouraging, they cannot hope for any major price advances,” says investment professional Eberhardt.

No quick turnaround at Nestlé

The problem is likely to persist. A quick turnaround is not foreseeable at either Nestlé or Roche. Roche is struggling with the fact that it currently has hardly any high-revenue drugs in late development. The CEO change at Nestlé is welcomed. But the market environment in which the group has to assert itself is tough.

In particular, the more price-conscious American consumers are causing problems for the food company, and the markets in Europe and China are also fragile. Although Nestlé presented robust financial figures for the second quarter, growth continues to falter with a sales increase of 2 percent. In addition, the annual forecast had to be revised downwards, which caused trouble.

That’s why the change in CEO couldn’t stop the share price from collapsing. Barclays analysts do not expect a trend reversal until 2026. While the shares of competitors such as Unilever have gained 28 percent since the beginning of the year as a result of sector rotation, Nestlé has slipped 14 percent.

Roche is also left behind

Roche also seems to no longer be able to keep up with the competition. Since the all-time high of 400 francs in April 2022, the price of the participation certificates has fallen to around 270 francs – a loss in value of a third. The pharmaceutical industry is currently in good shape. Roche was once a leader in cancer therapies, but the Basel-based company has lost this position in recent years.

Disappointing results in Alzheimer’s research made matters worse. Now luck is being sought with cures for obesity and high blood pressure, but success is yet to come. So far it is not clear where the future sources of revenue will come from. Roche is currently being left behind by the competition: the British AstraZeneca is more successful when it comes to cancer therapies, and when it comes to fat-loss products it has little chance against the market leaders Novo Nordisk and Eli Lilly.

Only Novartis is a bright spot among the three heavyweights. Thanks to promising study results and sales success with a drug against breast cancer and clever acquisitions, the pharmaceutical company has expanded its position in oncology. He also generates growing revenue from several products that were launched a long time ago. There were also the spin-offs Alcon (2019) and Sandoz (2023), which were also profitable for the parent company. The stock market’s expectations have mostly been exceeded recently; shares have gained a tenth since the beginning of the year.

At least “defensive qualities”

The Novartis share performance also pales in comparison to that of its foreign competitors, but at least it does not weigh on the SMI. But as long as two out of three heavyweights are lame, Switzerland will not be able to keep up with the European stock exchanges.

A positive aspect of the three “supertankers”, however, is that they also determine the sector mix of the SMI, with a focus on basic goods and pharmaceuticals. Indices such as the DAX are more cyclical and tend to benefit from an improving economy. The SMI can score points with defensive qualities.

“There is some evidence to suggest that the SMI is more resilient in the event of an economic slowdown,” says Eberhardt. Because technology stocks are missing, a correction in this sector could largely bypass the SMI, he believes. If concerns arise about growth in the euro zone or the US economy slows down, you are well prepared with the defensive sectors of the SMI.