Tomorrow’s champions in times of volatility
19 JUN, 2023
With the tightening of policies implemented by central banks with the aim of curbing uncontrolled inflation at the beginning of 2022, the scenario was somewhat diffuse and uncertain. Following this line, the turbulent beginning of 2023, with the fall of Silicon Valley and the consequent impact on Europe with the end of Credit Suisse, already seemed to presage the continuity of market volatility.
However, even in this context, a window of significant investment opportunities opens up if attention is paid to the right factors. But what are the parameters to follow in order to identify the "champions of tomorrow"?
First of all, it is worth defining this innovative concept that we have been coining for more than a decade now. The so-called "champions of tomorrow" are companies with high barriers to entry, total control of their industrial strategy, great capacity for structural growth, and operating in niche markets where Europe plays a global leadership role.
To find out who these champions of tomorrow are, it is first of all important to analyze the company's own business model to find out to what extent they depend on exogenous factors over which they have no control, such as interest rates or raw material prices. In this sense, one element that becomes essential is your net cash positions which, in turn, are a direct consequence of the dominance of your own market niches and can therefore generate comfortable margins and cash flows. Therefore, the increase in interest rates does not have a direct impact on the development capacity of this type of company in the medium to long term.
In fact, it is curious how, in some cases, this type of company could even benefit from central bank policies. How? These rate hikes would put more pressure on weaker and more indebted competitors so that those more independent of market movements would gain additional market shares or make opportunistic acquisitions, as was seen during the height of the COVID crisis.
Moreover, we should add that these companies are very well prepared for sustained inflation rates because their pricing power is high. Competitors with lower value-added products or other companies involved in more commoditized businesses should suffer much more.
Additionally, we see notable investment opportunities in the technology sector, which had very optimal profitability in 2023. It is true that when we talk about technology companies, we implicitly think of large-cap companies, and mainly U.S. companies. However, small- and mid-cap technology companies are very attractive in Europe and have performed impressively well so far. To be more specific, in segments such as medical technology, digital innovation, and industrial and logistics automation, we see oversold margins above 25%, operating margins above 20%, and profit growth above 25%. In short, these are very robust companies that can perform more than optimally and navigate smoothly in a market environment as complex as the one we are undoubtedly going through.
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