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The Swiss SMI index, which contains 20 stocks, differs in one essential characteristic from other indices - it is dominated by just three companies. The three heavyweights Novartis , Nestlé and Roche account for more than 60 percent of the index weighting. The SMI therefore depends greatly on the performance of these three securities. If you want to be successful in trading the SMI you should therefore keep a close eye on these companies.
With a market capitalization of USD 237 billion, Nestlé is globally the largest company in the consumer staples sector - an advantage that the newly appointed CFO, Mr. Francois-Xavier Roger, wants to take advantage of by wanting to press purchase prices. The recently announced buyback program for its own shares as well as the announcement of a stable dividend are further positive signals to shareholders. On the other hand, the risks that need to be taken into account, is a continued strength of the Swiss franc, in particular with regard to the main rivals Danone and Unilever who benefit from a weaker euro, and a deterioration of the consumer environment. Nestlé is currently trading at a PE of 16.6, which is well below the industry average of 24. Nevertheless – as Nestlé is currently trading close to its all-time high of 77 CHF we prefer to put the stock on hold.
Novartis AG and Roche Holding AG
With a market capitalization of USD 236 billion and USD 219 billion respectively the two pharmaceutical giants are the second and third largest companies within the health care sector. Both, Novartis and Roche, are currently suffering from the strong Swiss franc. Nevertheless both companies manage to convince with new products. With the US approval of the drug Entresto for treating heart failure, Novartis has a new product in place, which is seen as the next new blockbuster.
Roche on the other hand is planning to tackle the market with its new drugs Perjeta (approved), Ocrelizumab (Phase III) and Atezolizumab (Phase II) in order to ensure future growth. Both Novartis and Roche are on our buying list with price targets of 100 CHF and 300 CHF respectively. However, caution is always advisable with pharmaceutical companies, as a failed authorization for a new drug may lead to strong price fluctuations.
The SMI is highly dependent on the individual fates of these three companies and the further development of the Swiss franc. Keep this in mind when trading the Swiss Index and do not focus exclusively on technical analysis.