For Swiss equities, as for most asset classes, 2022 was marked by economic imbalances triggered by the Covid pandemic, disrupted value chains, product shortages and, above all, a strong surge in inflation, interest rate hikes and Russia's invasion of Ukraine.
At the end of the year, negative headlines largely dominated the news flow. Those talking to Swiss companies today will hear a fairly uniform picture: uncertainty prevails in the short term. But companies also have another message, which is much more important from our point of view: they are confident for the medium and longer term, and we share that confidence.
Over the years we have focused our Swiss investment strategies on growth. Through the consistent selection of growth-orientated companies, various structural growth trends aggregated throughout our investment portfolios. In the coming years these should favour a dynamic business development for a number of Swiss small and mid cap companies. GAM Investments’ Thomas Funk, Investment Director for Swiss Equities, identifies four structural trends which will likely act as growth drivers favourable to our investment strategies.
- Productivity gains
The first is not obvious – it is productivity gains. Wages are rising in the US and it is increasingly difficult to pass on the higher costs to the end products. Markets are becoming more competitive again after the Covid-related disruptions in value chains, as they are better supplied with goods. Buyers can now increasingly choose where they buy; pricing power through scarcity is disappearing. This means that productivity must increase, otherwise margins will suffer. Various companies offer welcome solutions to increase efficiency, for example Bossard, a Swiss fastener technology and logistics company, with design know-how and intelligent storage systems. The company reports that demand for such solutions has picked up. We think the world will see a productivity boost from higher inflation. In Europe, the situation is somewhat different than in the US. Here, companies are increasingly concerned with a shortage in skilled labour, but the answer is the same – productivity must increase. The good news is, productivity leaps are possible, not least thanks to a second structural growth trend.
- The digitalisation of the economy
The digitalisation of the economy in more and more areas is enabling solutions that were previously unthinkable. Manufacturing systems are becoming smarter, production steps are being eliminated and integrated into others, automation is taking place and better quality controls are reducing scrap rates. Rapid advances in semiconductor technology are enabling new approaches, better solutions and innovative products. Image comparisons using artificial intelligence are automating and improving medical diagnoses. Sensors are measuring more and more variables and enabling systems to be better controlled, for example in the heating, ventilation and cooling of buildings. This can save energy and improve the indoor climate. The semiconductor industry is at the centre of the digitalisation trend. In our view, it will grow for years to come, but it will require a continued high rate of innovation. Currently, the memory chip market tends to be weak due to short-term overcapacity. However, two-thirds of the market is now other chips and for these, growth can be expected in 2023 as well.
- The energy transition
The third structural growth trend is the energy transition. The world has set out to solve the energy problem. There will be winners and losers. Gases are experiencing a revival in demand because they are cleaner than liquid fuels and have a high energy density. To be used, the gases have to be compressed. We believe Burckhardt Compression is a market leader of high-performance compressors. Current measurement components from LEM play a central role in the better control of energy, in e-mobility, but also increasingly in the control of industrial motors, where old technology is still common. Landis+Gyr solutions can be used to better control power grids, which are increasingly subject to fluctuations as the share of renewable energies increases. Control systems from Belimo enable significantly improved energy efficiency in buildings and Accelleron has invested significant resources in turbocharger solutions for new cleaner engine types. In the maritime sector, for example, a change in engines is emerging. It is already more advanced in the very largest ships, such as LNG tankers. The trend here is also towards gases and gas mixtures. This requires new solutions.
The fourth structural growth trend is in medicine, with new innovative medicines coming onto the market. Peptides, which are small protein building blocks, are experiencing a real boom and there is no end in sight for years to come. Bachem is a market leader, in our view. The company has the necessary funds to increase production capacities and further expand its market leadership. A new growth area is oligonucleotides, which open up new mechanisms of action. Most of us have already come into contact with an oligonucleotide through Covid vaccination, but that is just the beginning. The new innovative active ingredients usually have to be injected. This provides Ypsomed with growth opportunities; we believe the Burgdorf company is the market leader in injection pens with a very high market share.
With the economic problems abating, combined with the growth potential, driven by the four structural trends discussed above, a new earnings cycle should start in 2023, carrying into 2024. We believe this would be a good basis for positive performance in Swiss equities.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not a reliable indicator of future results or current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented and are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. There is no guarantee that forecasts will be realised.