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Trends in individual equities: Winners vs. losers “made in Switzerland”
The “stock market spring” of 2021 is likely to be one of the “main events”: one that many investors will remember as vividly as the turbulent year 2022.
Learn why looking at trends isn’t always the most critical factor when evaluating equities. And why the Swiss stock market is able to incorporate many trends very well.
In times of soaring share prices, sooner or later many investors begin to ask: “how long can this go on? When has the time come when I shouldn’t be going in any deeper, but rather getting out – and taking my profits with me?”
This question doesn’t arise simply because there may be more and more apprehension about the next bear market or big crash. It also arises because of the increasing need to distinguish real value and long-term potential from merely riding the current upward trend – in other words, the need to be able to separate the wheat from the chaff.
Investors will be hoping they can make this precise distinction successfully, so that they are able to keep benefiting from the upward trend for longer. And the less susceptible their investments will be to sell-offs that will eventually take place later.
“Not all technology is created equal – and the same goes for trends.”
A popular way to orient yourself in the maze of opportunities and risks is to stick to the big trends. You will hear things like, “Digitization will determine the winners – and the losers.” Or: “Thanks to COVID, pharmaceutical companies are at a big advantage.”
Even though you may be surrounded by statements like these, you would still have to respond to them by saying, “Well, yes and no.”
This is because if you are only looking at the markets through the lens of a trend – i.e., top-down – you may overlook the flip side of the coin. Which is, namely, that not every market participant in the technology sector will benefit equally from the much vaunted “fourth revolution.” On the contrary. If the “Big Five” from Silicon Valley teach us one thing, it’s this: Developing disruptive technologies is not enough; what you have to disrupt is markets.Or in other words: It’s a “winner takes all” world.
This experience and knowledge, combined with systematic research work, makes it possible to identify winners and losers within individual trends. To do this, the industry in which a company operates is important, but also which technologies and business models are behind their business activity, how consistent management is in the execution of its strategy, or how well it integrates ESG criteria.
“How a company integrates or exploits a trend is often at least as important as the trend itself.”
Current research results show that on average, Swiss shares have weathered the COVID crisis moderately well to very well, apart from individual exceptions such as shares of companies in the travel industry. However, if you attribute these outcomes only to the market environment of the last few months, you are failing to recognize four key factors that can make Swiss shares more crisis-resistant.
The safe haven that the franc offers many investors turns out to be both a curse and a blessing for Swiss export companies.
For decades, Swiss companies have had to make up for a currency disadvantage on the world market that makes price leadership strategies difficult or impossible right from the outset. This is the curse. However, this disadvantage tends to push them into the role of innovation leader instead, which is the blessing. They occupy this position partly in global markets or else in the segment of small and mid-cap firms operating in niche markets in which they have established market leadership. Companies in these market positions have repeatedly proven to be less vulnerable in times of crisis.
The Swiss market is a small market. Consequently, for Swiss companies the greatest potential for growth is almost always outside their own country.
This export pressure drives Swiss companies to integrate insights gained in foreign markets into their products, business models, and strategies at an early stage. This includes, among other things, the ability to scale their own business across national borders.
From a historical viewpoint, Swiss federalism has many hallmarks, but rapid change is not one of them.
From a business perspective, this is reflected in a pronounced degree of legal certainty. Regulatory provisions are established to be valid for the long term, and this means that changes can be foreseen and planned for. Regulations are also less likely to either favor or disadvantage individual competitors.
Switzerland as a business location enjoys an excellent international reputation – despite the comparatively high wage levels here.
Companies that set up in Switzerland give more weight to the fact that they will encounter flexible labor markets here, can count on a highly qualified workforce, and will contend with a moderate tax burden. This in turn favors innovative capabilities and ultimately the opportunity to gain a strong market position and maintain staying power through crises.
Anyone who judges winners and losers on the Swiss stock market is doing so for a very special part of the world market. Trends such as global technological change or the integration of ESG criteria can fall on fertile ground here. But even trends such as those affecting the travel industry, which have caused sleepless nights in other Developed Markets, can also have an impact in Switzerland. That is why it is always worthwhile complementing the “top down” view with a “bottom up” perspective.
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