Market commentary of May 6, 2022
If not now, when? Investing in entrepreneurs for stability and growth
Birgitte Olsen, Lead Portfolio Manager of the Bellevue Entrepreneur strategies, Bellevue Asset Management
Uncertainty on financial markets is currently high and investors are increasingly looking for help in navigating today's markets. Owner-managed companies represent a viable alternative in this environment of heightened volatility and patchy visibility. These mostly small and mid-sized companies are more agile than large companies and they boast numerous other advantages as well. These range from high levels of continuity and sound long-term business strategies to low levels of debt, if any, strong pricing power, often thanks to a niche market focus, and reliable returns. Advantages that pay off two-fold in uncertain and turbulent times.
For weeks now – not just since Russian troops invaded Ukraine, although since then the ride has become more volatile – the stock market has been moving in both directions at a dizzying speed. Winning and losing sectors, and the winners and losers within a single sector, have often changed quickly and unexpectedly. Energy stocks, for example, were long neglected, but they suddenly experienced a strong revival, whereas one-time darling tech stocks were dumped. Markets generally dived when the conflict in Ukraine erupted into a full-blown war, but they recovered faster than one would have expected given the rather gloomy environment with continued supply chain disruptions, galloping inflation, and worries about higher interest rates and a recession.
Financial analysts have some catching-up to do
Once again, good advice is hard to come by. Economists have lowered their GDP growth forecasts, but many financial analysts have yet to adjust their earnings models. They first want to see the results and management commentary for the first quarter of 2022, which should improve visibility. Downward revisions of earnings estimates can be expected under the current circumstances. This will inevitably lead to markdowns in the price of some stocks.
A lack of transparency is something that has long been held against owner-managed companies. Such criticism is no longer warranted. For about five years now, entrepreneur companies, those with a shareholder who has a controlling or dominating interest in the company, have become increasingly transparent. ESG (environmental, social and governance) is here to stay in the investment world. Modern corporate governance policies are now also the rule rather than the exception in the entrepreneur space.
What hasn’t changed are the traditional strengths these companies offer – their long-term horizons, with a generational (and not quarterly) perspective, management continuity, a strong commitment to capital preservation, and above-average returns on equity, which translate into above-average returns for all shareholders. These companies are naturally disinclined to take on debt. That is paying off in the current environment of rising interest rates. Entrepreneurs have invested their own money in the companies they own and run, which is why they are distinguished by strict financial controls, for example, low levels of debt, if any at all, a cost-conscious culture, good profit margins, and ample resources for innovation.
There's always a Plan B
History has shown that owner-managed companies don't wait for paradigm shifts that force them to take action. Given their corporate far-sightedness, they always have a Plan B in the drawer. In difficult times, they profit from their reliable business partnerships. That is a tremendous advantage when commodity prices are soaring, supply chains are disrupted, and customers are threatening to take their business elsewhere.
Some dark clouds have gathered over the economy. Germany, a country highly reliant on Russian oil and gas, is in a particularly uncomfortable position. We do not expect a recession, but a sudden ban on imports of Russian fossil fuels could trigger one. The European Union, and especially Germany, are unlikely to risk such radical action in view of the consequences this would have on their own industrial sectors and their own citizens.
Energy transition winners
An even faster transition toward green energies is, on the other hand, imperative and it has been plain to see too. Political leaders are more willing to move in that direction now because of the war in Ukraine and the sharp increase in oil and gas prices. In Germany, for example, legislators are considering raising the country's clean energy target to 80% of its overall power mix by 2030. Such a rapid transition will not be possible without state subsidies. The previously slim profit margins of clean energy equipment manufacturers and producers are likely to widen as a result. Two of the winners among the entrepreneur companies active in this area are Burckhardt Compression, a Swiss compressor manufacturer, and Subsea7, a Norwegian provider of services to the energy sector.
An acceleration of the clean energy transition will benefit numerous companies. Renewable energy and sustainability go hand in hand. Therefore companies that are proactively pursuing a long-term ESG strategy are attractive for investors. Stora Enso is a prime example here. This Finnish company is the second-largest private forest owner in the world. It is swiftly evolving from a paper producer to a specialist for packaging, biomaterials and wood-based products. Fiber-based materials can be renewed and recycled. Today it is already possible to build high-rise buildings with more than 30 floors using wood instead of steel and concrete.
Travel and leisure is another topic that offers investor opportunities. After two years of the pandemic, consumers are eager to ramp up their social lives and start traveling again. This has brightened the outlook for companies in the consumer goods, leisure and travel sectors that are fairly well-protected against inflation. Examples here include the wine and spirits producer Pernod Ricard, the Norwegian salmon farming company Bakkafrost and, in Switzerland, the watchmaker Swatch Group, Zurich Airport, and Last Minute, a still small online player offering individual travel arrangements.
Strong players about to get stronger
The range of investment opportunities is widely scattered. Focusing exclusively on defensive plays will lead to opportunity costs as investors miss out on growth opportunities, examples of which are U-Blox in Switzerland and Sopra Steria in France, two tech companies whose shares have been battered. And the opposite is true as well.
Higher interest rates will not be negative for every company either. Financial services providers and insurance companies will actually benefit from higher interest rates.
Diversification, also with respect to investment styles, is critical when markets are volatile and uncertainty is high. As growth rates subside, strong players are likely to squeeze out weak ones and become even stronger in the process. In such a scenario, with geopolitical turmoil as well as opportunities driven by structural change, owner-managed businesses are holding the right cards.
Author
Birgitte Olsen, CFA, senior portfolio manager European equities, joined Bellevue Asset Management in 2008 and assumes responsibility for European Equities as well as for institutional mandates. She previously spent over nine years at Generali Investments in Cologne as deputy head of equities managing European portfolios and thematic funds. As portfolio manager and analyst for the German and Scandinavian regions she worked from 1997 to 1998 with Vontobel Asset Management in Zurich. Birgitte Olsen started her career in the financial industry 1994 as a sell-side analyst at Bank am Bellevue, focusing on the insurance and pharmaceutical sectors. She graduated from the University of St. Gallen in 1992 with a degree in finance and accounting.
Contact
Bellevue Asset Management AG, Seestrasse 16 / P.O. Box, CH-8700 Küsnacht/Zurich,
Tanja Chicherio, tel. +41 44 267 67 09, tch@bellevue.ch
www.bellevue.ch
Bellevue – Excellence in Specialty Investments
Bellevue is a specialized asset manager listed on the SIX Swiss Exchange with core competencies covering healthcare strategies, entrepreneur strategies, alternative and traditional investment strategies. Established in 1993, Bellevue, a House of Investment Ideas staffed by 100 professionals, generates attractive investment returns and creates value added for clients and shareholders alike. Bellevue managed assets of CHF 12.8 bn as at December 31, 2021.
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