Nicolas Bürki, of Reyl Intesa Sanpaolo, avoids overly cyclical Swiss stocks and prefers healthcare stocks and niche companies.
Swiss stocks are consolidating after a major rise since the start of the year. But the factors that explain these gains and the underlying trends vary from one sector to another, and even from one company to another. Nicolas Bürki, financial analyst and portfolio manager for Reyl Intesa Sanpaolo, answers questions from Allnews:
Are you rather bullish on stocks at the moment, particularly on Swiss stocks?
Our equity allocation is neutral with an overweighting of Swiss stocks. This choice results from taking into account numerous factors, including marked uncertainty in geopolitical, economic and monetary matters. The situation differs from one region to another. Signs of slowdown are appearing in the United States while Europe is gradually emerging from stagnation.
The Swiss market presents profit growth lower than that of the United States, but with a more advantageous valuation for comparable financial quality, and profit growth higher than that of Europe, for a higher valuation.
What is your opinion of the three largest Swiss capitalizations?
Times are complicated for our three leaders, Nestlé and the two pharmas Roche and Novartis. An American presidential year is rarely accompanied by a sharp rise in pharmaceutical stocks, for fear of pressure on prices. But political debates are currently focused on themes other than health.
“In large stocks, Roche pleases us because it belongs to the category of neglected stocks.”
The market fears the introduction of a reference price. Joe Biden’s program seems less aggressive but more structured on this subject than that of Donald Trump. The pharmaceutical companies defend themselves by indicating that the drug purchasing centers take a share of the margins. It remains true that American drug prices are the highest in the world. The weight of the lobbies and the complexity will not change quickly. Convergence has been regularly mentioned in political speeches for decades but it has not materialized.
Do you prefer Roche or Novartis?
The divergence between Roche, long seen as the good student in terms of innovation and return on invested capital, and Novartis, whose profile has long been close to the conglomerate, is interesting. Novartis became a pure pharma after separating from Sandoz and its results exceeded expectations both in 2023 and 2024. Conversely, Roche is the despair of many investors but the management was able to outline its prospects quite clearly , in particular on the negative effects of the end of covid, which should end in the first quarter. An appointment is therefore made for the results published at the end of July.
When comparing two stocks, some investors tend to favor the winner and ignore the loser. In light of analyst recommendations, the potential amounts to 6% for Novartis and 12% for Roche. The latter has suffered disappointments in its research projects, for example against Alzheimer’s disease, and a reorganization of both management and research projects whose results will emerge in the medium term. The positioning in favor of Roche is more “contrarian”, but the group benefits from strong cash flow generation, an attractive dividend yield and a low probability of deterioration of its innovation capabilities. The momentum favors Novartis while the “contrarians” prefer Roche at the current level, especially since its stock market decline seems to have ended in recent weeks.
Between Nestlé and Givaudan, which do you prefer?
The market prefers Givaudan to Nestlé in the category of defensive growth companies. Nestlé managed to raise its prices over the last two years during the inflation phase but the sales volume declined in 2023. For 2024, management has forecast a lull in prices and a return to rising volumes. Expectations were disappointed in the first quarter and the stock also suffered from several controversies (pizzas and water in France). The stock has, however, returned to a more attractive valuation in historical comparison (its price/earnings ratio at 18.5x is at its 10-year average, and the same ratio relative to the Swiss market too). Analyst targets are 13% higher than the current price, a percentage to which the investor can add the 3% dividend yield. Despite its strengths, however, the title has disappointed since fall 2023.
Like the comparison between Novartis and Roche, momentum benefits Givaudan, which is approaching the all-time high, while analysts have a price target 10% lower at the current price. Its valuation is not cheap. Givaudan has the advantage of strong growth and greater customer diversity than Nestlé.
Small and mid-caps are struggling to rebound despite low valuations. Is this due to the weakening of American growth or a “risk off” situation for investors?
We are in the middle of the barometer between “Risk on” and “Risk off”, therefore neutral. Earnings growth justifies our neutral weighting on stocks, but clouds threaten the outlook. Small and mid caps underperform in most markets, but with strong divergences within this sub-universe. Their valuation multiples have deflated with the rise in interest rates, since they are considered to be more indebted, and the craze for large growth caps, considered to be of better quality. More economic visibility will likely be needed for investors to venture into it en masse.
Which sectors do you recommend?
Due to a fundamental approach, we prefer to select individual stocks rather than sectors. In Switzerland, alongside the problem of domination of the index by three leaders, sectoral analysis is not as useful as elsewhere.
We seek to favor defensive growth after a rebound in indices of around 20% since October 2023 of companies which are active in segments or a geography with their intrinsic dynamics, if possible less correlated to the overall economy. The Reward/Risk ratio is less attractive after this increase. The upside potential is limited. We avoid stocks that are too cyclical and prefer, for example, health or niche companies whose stocks are a little neglected.
For example?
In the current market situation and in large values, it is difficult to find irresistible deals. Roche pleases us because it belongs to the category of neglected titles. I will also mention medical technologies, like Straumann and Tecan after their withdrawal.
In the medium term, it may be interesting to position yourself in Swisscom, which fell this year after its acquisition in Italy which led it to increase its debt. The prospect of an increase in the dividend is not negligible.
It would also be interesting to position yourself among technological leaders, such as Sika, during their consolidation. Temenos has liquidity generation relative to its high price, but the stock took a beating after accusations from a short seller. The publication of the audit was reassuring.
In food packaging, SIG fell after a change in management and an increase in debt linked to an acquisition. The new CFO recognized that communication was not optimal about the fruits of this acquisition. The stock price is therefore waiting for the next results and news on this acquisition before reacting. Fundamentally, SIG seems well placed to me, benefiting from a form of duopoly on its market, strong cash generation and a presence in a sector, packaging, with stable characteristics.
What do you think of the concern over France and the increase in its rate spread? Should we reduce actions linked to France?
Swiss companies reacted little to the news. On the other hand, the threat of a European crisis would not encourage investors to buy European small & mid caps. Strategists favor this sector when seeking exposure to a domestic market.
But this reasoning does not work when it comes to Switzerland. Apart from cantonal banks and real estate, Swiss small & mid caps are international. Many Swiss companies present a profile with 40% of business in Europe, a third in America and 20% in Asia.
In the event of fear of a European crisis and a “Risk off” situation, investors should once again favor the usual champions of the rating, i.e. large values rather than small and mid caps.
Is it better to continue to ignore stocks whose multiple is less than 15 times?
Considering only the multiple is simplistic, especially since quality Swiss securities, as elsewhere, are traded at a premium to this average. This process of focusing on leaders risks preventing good opportunities from being seized in the medium term. Sooner or later small & mid caps will recover.
Has luxury corrected enough?
Luxury players depend primarily on the Chinese market, a market which has not rebounded as much as expected. China is also threatened by the escalation of retaliatory measures with Western countries.
The United States and Europe have somewhat saved the day for luxury stocks. In Switzerland, Swatch suffered from its management’s communication, but the stock is one of the only ones to trade with a P/Book less than 1.
Luxury is at the intersection of two critical points, China and doubts about the continued strength of consumption. However, the sector trend remains favorable, as shown by Richemont’s results and recent watch exports.
What should you avoid?
Out-of-pocket healthcare spending may be in a transition year, as increases during or catch-up after COVID could result in stagnation this year for dental implants and hearing aids.
Does the Swiss market react more to rates, the franc or profits?
Profits above all. Analysts waited until April-May to reflect the fall in the Swiss franc and raise profit expectations for 2024. Communication is done a lot on the figures before currency effects, while currencies come next.
However, the more companies have a cost base in francs greater than their Swiss revenues, the more the effect on margins is real and not just cosmetic. A significant rebound in earnings expectations occurred in April and May following the fall in the franc and first quarter results.
Rates have an effect on valuation multiples, financing costs and income through indirect effect, but a 0.25% decline in the key rate in Switzerland is not the most significant factor.
