investment viewpoints
Structural trends and Swiss equities
Structural trends determine future winners in Swiss equities
Global megatrends not only change society to a great extent, but also the economy at the same time. Companies that do not adapt sustainably to structural change are in danger of losing touch - and in a very short time. This means that Swiss companies, many of which are among the world's leading market players, are also facing new challenges. Here we show how the Golden Age team identifies future winners in the Swiss equity market and give examples of companies that are successfully exploiting the opportunities arising from long-term transformative trends.
Climate change, demographics, and inequality are among the megatrends driving the sustainability revolution. Unlike normal trends that last only a few years, megatrends have a duration of several decades. Let's take the example of the ageing of society. On the one hand, it is largely seen as a problem, but in companies it can contribute to a new dynamism. This is the case when megatrends are integrated into corporate decision-making processes and new products or services, for example, are developed for this problem.
The need to transition to a more sustainable economic model will create boundless opportunities for companies to thrive and prosper, and will also create some completely new business models. Digitalisation and technology will play a hugely important role in enabling new and existing companies find more sustainable ways of doing things.
For this reason, we are convinced that megatrends play a particularly important role in the assessment of companies. After all, only companies that exploit the opportunities offered by structural changes will be among the winners in the future. We invest in companies that pursue a sustainable business model and have the potential to generate interesting excess returns with an attractive risk-return profile.
"A sustainable business model that integrates global megatrends will be the most important success factor in the future."
Basis of our analysis: the 3-pillar approach
In order to identify which Swiss companies are best positioned, we are guided by a 3-pillar approach. We use this principle to assess the sustainability of a company's financing model, business practices and business model.
- Pillar 1: The starting point for every investment decision is a company's financial strength.
- Pillar 2: In order to generate long-term added value, we believe that a company must pay equal attention to both its business practices and its financial performance.
- Pillar 3: We assess the sustainability of a business model against the long-term trends of a global economy moving towards a more sustainable model.
A forward-looking analysis is important to understand whether a company's performance is repeatable and sustainable in the long term. The central question here is: How well is a company positioned to take advantage of the opportunities brought about by change? The analysis is based on the megatrends mentioned above, which will shape our economic and social development. They create profound, long-term challenges that companies must understand if they are to succeed.
Individual companies in the research focus
Swiss companies in particular stand out in terms of key financial figures such as earnings growth, profit margin, return on capital and dividends as well as their above-average quality. In addition, they are highly innovative and competitive, making them global leaders in many industries. For this reason, they have generally outperformed many comparable European and global counterparts in the past. Our bottom-up investment approach is based on comprehensive research. It aims to identify market leaders with clear competitive advantages, proven management and above-average growth prospects. The basis for stock selection is the inclusion of megatrends, i.e. structural changes.
Below we outline three examples of companies that have aligned their business models in such a way as to tap the potential of megatrends in a sustainable and profitable way.
41 of the top 50 banks worldwide use Temenos services
Temenos1 is the market leader in digital banking platforms and is represented in 150 countries worldwide. The company recognized early on that the realignment of its software is at the heart of banks' digitization efforts. A large number of technology trends are driving this digital change. These include iCloud, Big Data, Artificial Intelligence, Blockchain and Application Programming Interfaces (API's). Temenos has taken up these trends and developed the best expandable and open banking software in the world today.
Traditional banks spend an average of 14.3 percent of their operating costs on IT. Less than 30 percent of these are allocated to corporate growth and innovation. Business as usual activities account for the largest share. In contrast, the share of IT costs for Temenos customers is only just under six percent, but more than half of this is accounted for by innovations. The result of the lower but future-oriented expenditure is a 36 percent higher return on equity for Temenos customers compared to banks that use conventional systems.
85 patent applications in 2018
Cars account for around twelve percent of total carbon dioxide emissions in the EU. The EU wants to counteract this by setting binding emission reduction targets for new cars. The aim is to reduce the fuel consumption of vehicles sold. The Swiss specialty chemicals group Sika has developed a solution for bonding mixed materials that make vehicles lighter and thus require less fuel. An idea that will help vehicle manufacturers meet EU targets.
In addition, the company offers system and technology solutions from the foundation to the roof. They all have one thing in common: they improve the CO2 footprint and help to combat climate change. And this happens in over 200 factories and sales companies in 101 countries. Around 851 product brands and 133 new inventions in 2018 alone give the company relevant market advantages2.
High-tech elevators with energy recovery
The Economist predicts3 that by 2050 about 64% of developing countries and 86% of developed countries will be urbanized. Schindler, a company that has existed since 1874, has recognized that technological advances such as mobility and green buildings are critical to providing cities with better living and working spaces. The latest production centers are certified to the most demanding standards for environmentally friendly construction. 80% of the environmental impact of an elevator results from the electricity it consumes over its lifetime. Schindler uses intelligent technologies to ensure that every elevator can operate efficiently, including reduced stops and travel times, to minimize energy consumption per passenger carried. The elevator in the aquaTower at Lake Constance, for example, therefore operates with energy recovery. It converts braking energy into electricity. The company's most important product lines for elevators feature drive technology that consumes 30 percent less energy than comparable elevators. Energy-saving LED lighting and a 50 percent reduction in the weight of the drive and load-bearing equipment further minimize energy consumption. In addition, all models are equipped with components that are at least 80 percent recyclable.
These are three examples of Swiss companies that have already successfully seized the opportunities offered by megatrends. We believe that the gap between companies that see sustainability as a foundation and those that do not integrate change into their business model will grow exponentially.
"Due to the high production costs in the domestic market, Swiss companies must be outstanding in their field".
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