By Matthias Born, head of equities and CIO at Berenberg WAM
In times of short-term volatility it may be better for investors to focus on the long term. Warren Buffett didn’t say that his favourite holding period is ‘forever’ for no reason; if investors are prepared to hold the right stock for a long time they don’t need to worry as much about short-term volatility.
We know our world is being reshaped, from an economic perspective, by powerful forces, and many investors find it useful to think about the big long-term structural trends that can underpin and drive a company’s success, particularly when the company has a strong business model with competitive advantages.
We believe the most important forces are techceleration, the Green Revolution and demographic change. These themes are nothing new to long-term investors, but there are many different ways to become plugged into these trends that many might not have thought of.
Techceleration
Technological change and the rapid “digitalisation of everything” is the most pervasive megatrend. It can radically alter the most entrenched business models, affects the widest range of sectors and drives exponential change.
While many are looking to the biggest companies in the world like Microsoft or Google to capitalise on this trend, there are several European small-cap companies are also key players here. For example, Fortnox is a Swedish software company that provides an integrated platform allowing companies to ease their workflow in areas such as accounting and HR.
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The company uses AI to make its platform easy to use while also reducing costs. With more companies looking to digitalise their operations, the expected user-base is expected to increase from 450,000 at the end of 2022 to over 700,000 in 2025. The beauty of Fortnox’s business model is that users are highly unlikely to change platforms once they have signed up, meaning that in the long term it will lose very few customers and make itself even more essential to the techceleration trend.
Green Revolution
Major economies around the world are aiming to achieve net zero by the middle of the century, and currently are a long way off. With this in mind, companies that can help businesses and countries become more sustainable are well positioned for strong and consistent growth.
A key industry to consider here is the electric vehicle sector, where the virtuous cycle of regulation, technological advancement and consumer adoption is driving massive growth. While many are rushing to invest in car manufacturers that are building more electric vehicles, it is very difficult to judge which one will be most successful, making this investment decision a bit of a shot in the dark.
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With any gold rush though, it makes more sense to invest in companies that make picks and shovels rather than the gold mines themselves. To this end, semiconductor companies such as Infineon (Germany’s largest semiconductor manufacturer) are well positioned to benefit from the growing EV market, given EVs require 4-5x the semiconductor content of a combustion engine. As Infineon has a market share in power semiconductors twice as large as its nearest competitor, it is in a strong position to capitalise on the shift towards electric vehicles.
Demographic changes
One might expect growth opportunities created by demographic changes to link to the ageing populations in Western economies. It is true that there are a number of opportunities here, but less attention is being paid to another tailwind: the rise of the Chinese consumer.
Last year, China accounted for more than a quarter of global consumption growth, and is projected to contribute 44% by 2040, driven by a rise in the Chinese middle class. This is truly remarkable growth that will continue in the long-term and a number of European companies are positioning themselves to take advantage, particularly in luxury goods, where China is set to account for 60% of spending growth in the luxury goods sector by 2030.
Companies that have an effective marketing strategy and execution are well-placed to take advantage of this, such as Moncler that already relies on Asia for almost 50% of its revenue. With the rise in middle class also set to occur in other emerging Asian economies, this demographic change is sure to drive huge growth in the long-term.
It is important to remember that while these megatrends provide the background music for underlying structural growth, they are not the ultimate drivers. We are convinced the future of long-term investing is structured around fundamental analysis of companies and identifying those that are innovative, have sustainable competitive advantages and an excellent management team.
While it is no coincidence that many of the best bets in the long-term are plugged into these three megatrends reshaping the global economy, the targeted selection of individual stocks remains the best way to tap into these big structural shifts, and investors shouldn’t assume sleepy old Europe is necessarily going to be left behind.
