Inflation protection for equities: seven criteria for selection

Insights, Perspectives 2021

30/11/2021 por Peter Romanzina Tiempo de lectura: 5 minuto(s)

Acerca del autor

Peter Romanzina

Head of Swiss Research

Más artículos

Inflation protection in equities: Who has the “pricing power” to pass on rising costs to customers?

“Pricing power” – the magic formula in times of inflation. Which Swiss companies have it?

It is no longer just a catch-line, it has become tangible in many countries: inflation. Are Swiss equities in portfolios now facing a stress test? The good news: there are companies that can pass on rising costs to their clients more efficiently than others. This article will help you focus on inflation protection when selecting shares.

Higher prices for raw materials, increasing difficulty in finding appropriate staff and continued delays in supply chains all lead to higher production costs. And that increases pressure on margins for many companies. How to deal with it? While some companies have considerable power when it comes to pricing, others find it a lot more difficult to pass costs on to clients. Shares in companies with “Pricing Power” have the advantage here – and offer better protection with rising inflation.

High inflation or low inflation? How to integrate the markets' uncertainty into the structure of your portfolio

What does inflation mean for investors?

After years without any inflation worth mentioning, now one inflation catch-line follows another. For many investors this is new territory. Correspondingly, their concerns with regard to portfolio performance in the “New Normal” are growing. We believe that the rise in prices is transitory. Though, it is worth analyzing the current situation from more than one perspective.

We have collected the views of five of our experts for you here:

To the focus article

Are Swiss companies impacted by inflation?

Big Swiss companies generate the lion’s share of their sales outside Switzerland. Nestlé, for example, only generates around 1.3 percent of sales at home. ¹ This means:

Many companies that are listed in Switzerland are affected more by the global situation than by inflation at home.
In a global environment they benefit from structural factors connected with Switzerland as an economic location. Because Swiss companies can rarely use a low-price strategy on the world market; instead, they must stand out by being innovative or by being market leaders. Swiss companies, therefore, are better positioned to dictate prices.
Read what structural factors favor Swissness in a portfolio

Exactly how much influence can a company have on pricing? Just taking a look at the sector on its own is not enough to enable an evaluation of competitiveness and pricing power. In this case, Michael E. Porter‘s industry structure model helps in making an initial evaluation.

Porter's industry structure model

Source: Porter’s five forces, own diagram © Vontobel

The Vontobel Research Team has derived seven important factors for analyzing competitiveness from this model.

7 points for determining the pricing power of a company

1. Margins

What effect do high – or even expanding – margins have? Insight: companies which are highly innovative normally generate higher gross margins because their share of added value is greater.

One example is Straumann^*, a world leader in implantology and dentistry.

2. Price wars

Which companies are able to stay out of price wars? Insight: differences between individual companies arise out of their market position and the market itself. In strongly regulated sectors such as the telecommunications industry, it is more difficult to pass on additional costs.

An example of a company with a low risk of involvement in price wars is Partners Group^*. For the Asset Manager, the bottleneck is not client demand, but opportunities to invest capital for them. Correspondingly, demand is larger than the offering and price pressure is lower.

3. Market growth

Do innovations drive a market? If so, leading companies often benefit from strong demand and do not need to make so many compromises on the price front.

VAT Group^* is a good example. Its high-end solutions for the strongly expanding semi-conductor sector make the company a major power on pricing.

4. Brand strength

What makes a strong brand? Insight: often a mix of various factors, e.g., high levels of innovativeness and a strategic brand leadership which gives rise to high levels of client loyalty.

Good examples are Cartier (part of Richemont^*) or various brands belonging to Nestlé^*, e.g., Nespresso.

5. Added value

Does the company offer clients added value in comparison with price? Insight: this often leads to strong client loyalty and, thus, reduced susceptibility to price wars.

An example is Belimo^*, which manufactures equipment for regulating heating, ventilation and air conditioning. This type of product generally has a very low share in the total costs of a building project, but can deliver high added value.

6. Risk

Must a company accept higher levels of risk in order to generate the same margin as competitors? Insight: this usually reduces pricing power.

From outside, it is scarcely possible to quantify many risks – they are often only visible at a later date, namely when they turn out to be “too high”. For that reason, we are foregoing citing a concrete example here; the margin for discretion is considerable.

7. Power concentration

Is there a strong concentration of power within the industry? Insight: in the technology sector, the so-called “winner takes it all” effect can be regularly observed. In other words, one company tops another and is subsequently able to maintain its pricing power. Typically, these are companies with platform models or knowledge-based business models.

The low interest rate environment over the last years has led to high liquidity on the financial markets. One consequence had been high levels of activity in mergers and acquisitions (consolidations, spin-offs and take-overs). This enabled the market leaders in the technology sector to further expand their strong position. Sector concentration is often measured in terms of the HHI (Herfinddahl-Hirschman Index). It can facilitate detection of market concentrations and the strength of (price) competition.

Temenos^*, the leading provider of banking software, is one example of a company in an advantageous market position.

1 Annual Review 2020, Page 49, retrieved 10.11.2021 at
https://www.nestle.com/sites/default/files/2021-03/2020-annual-review-de.pdf

* The companies listed in this article emphasize how the seven-point model supports analysis of industries and individual stocks. They are examples arising out of research results and are not investment ideas or recommendations.

ESG Advisory from A to Z

Looking at the big picture up close

Today, investors’ goals and the world’s need for action—the big picture—are clearer than ever. However, when you get into the details, complexity increases.

Explore what matters

Let our experts advise you without any obligation.

After sending the form you will receive an email asking you to confirm your email address.

Estoy interesada en

Saludo

Señor Señora

Nombre primero

Apellido

Correo electrónico

Phone number

País

Postal code

Tengo una pregunta especifica

Legal notice

The data transmitted to Vontobel using this form are sent encrypted via the Internet. However, the possibility of unauthorized third parties accessing the transmitted data, particularly using malware on the computer, cannot fully be excluded. If you are using this form to send confidential data (e.g. your account number), you accept the risk of disclosure of your banking relationship and bank account information to third parties and you release Vontobel from any and all liability for damages incurred as a result of the use of this form, to the extent that such release is permitted by the law.

By providing your phone number and/or email address, you declare your express consent to Vontobel contacting you by phone and/or unsecured email. The personal data provided by you are used and stored to handle and process your inquiry and in order for us to perform our contractual duties in connection with the services chosen by you. The personal data may be processed on behalf of Vontobel by a subcontractor engaged by Vontobel, including outside your own or Vontobel’s location. Your personal data are processed and stored for the duration of our business relationship. In addition, we are subject to a number of duties to retain and document. Finally, the duration of storage is also determined by the statutory limitation periods.

Please note that the use of email and electronic means of communication involves significant risks, such as lack of confidentiality, possible manipulation of contents or sender, dispatch to the wrong recipient, viruses, etc. Vontobel does not accept any responsibility for damages in connection with the use of emails and electronic means of communication. Vontobel therefore also recommends that you do not send sensitive information by email, that received text is not included in responses and that the email address is newly entered manually each time.

Vontobel does not accept orders for commercial transactions such as the opening of accounts, payment or stock market orders, cancellations of orders or authorizations, blocking of credit cards, changes of address etc. via this form. Please contact your branch or your relationship manager with regard to such transactions.

The information and/or documents offered on this website represent marketing material pursuant to Art. 68 of the Swiss FinSA and are provided for information purposes only. On request, further documents such as the basic information sheet or the prospectus are available free of charge whenever you wish. The products, services, information, and/or documents offered on this website may not be accessible to individuals domiciled in certain countries. Please note the applicable sales restrictions of the respective products or services.

Not all products and services are available in all countries.

Bank Vontobel AG
General Counsel
Gotthardstrasse 43
CH-8022 Zürich

Terms and Conditions of Use
Privacy Policy

Please confirm that you have read, understood and accepted the legal notices in connection with the use of our website and the related services (Terms and Conditions of Use and the Privacy Policy).
I have read and agree to the above-mentioned legal notices. *

Enter:

*
Información obligatoria

Advertencias legales
Publicación creada por Bank Vontobel AG, Zurich (Vontobel). Este documento no se dirige expresamente a personas que, por razones de nacionalidad o lugar de residencia, no tengan permitido el acceso a esta información en virtud de su legislación local. Esta publicación es material de marketing, se proporciona solo con fines informativos y no tiene en cuenta necesidades, objetivos de inversión ni circunstancias financieras de carácter individual. Esta publicación no constituye ninguna oferta, invitación ni recomendación de usar el servicio de Vontobel aquí descrito, ni de comprar o vender valores u otros instrumentos financieros ni de participar en una estrategia de inversión. Los gastos de capital de los mercados y productos financieros conllevan una serie de riesgos (de mercado, cambiario o de liquidez). Antes de tomar una decisión de inversión, los inversionistas deberían recibir asesoría personal de su asesor fiscal y financiero sobre los riesgos relacionados con la inversión y su situación personal. El contenido, el alcance y los precios de los productos y servicios descritos en la presente publicación se rigen exclusivamente por el acuerdo contraído con el inversionista individual.

La información y/o los documentos presentes en este sitio web constituirán material publicitario en virtud del artículo 68 de la Ley suiza de servicios financieros y se publicarán únicamente con fines informativos. Siempre que lo desee, podrá solicitar de forma gratuita más documentación como, por ejemplo, la ficha informativa básica o el folleto. Los productos, servicios, información y/o documentos ofrecidos en este sitio web pueden no estar disponibles para personas residentes en determinados países. Tenga en cuenta también las restricciones de venta aplicables a los respectivos productos o servicios.

Topics

Perspectives 2021

Asset Management

Wealth Management

Digital Investing

Platforms

About Vontobel