Risk capital: Catalyst for innovation

The force of the better idea: A driver of the economy

In turbulent times, it is worth looking at what really drives society and the economy forward in the long term: the force of disruptive innovation, in other words the force of the better idea. With risk capital behind it, this force can bring about new developments, thus driving progress. Read how innovation creates economic resilience and what opportunities thematic investments offer for next year and beyond.

The force of the better idea and disruptive innovation has always been an engine of socioeconomic development. For example, the Stone Age came to an end because of the emergence of metalworking. Some 200 years ago, the conversion of fossil energy sources into electricity led to industrialisation, sparking a global population explosion from 200 million to the current figure of 8 billion people.

Today, humanity is on the cusp of a new stage: according to data from the International Energy Agency (IEA), the consumption of fossil fuels will start to fall even before 2030. While crude oil and gas will not disappear permanently, they will probably be superseded by new energy generation solutions.1 This is the surest way to efficiency and productivity gains. A closer look shows that innovation, productivity, and profits essentially go hand in hand.

1) Any statements about the future contained in this material are forward-looking and therefore subject to various risks and uncertainties. They provide no guarantee of future results or performance.

The big picture – global capital productivity

In recent years, there has been a structural increase in corporate profit margins despite inflation and wage growth. What are the reasons for this? The most apposite answer consists of just one word: productivity. This is especially evident in the United States. When the profit margin across the Atlantic reaches a record level – despite rising material costs and higher wages – higher productivity is the only plausible explanation for this apparently paradoxical trend. Such productivity increases initially require capital investments – for example in digitalisation, machinery or robots. Thanks to the phase of zero interest rates since 2009, companies in industrialised nations had their noses in front of emerging markets.

A look at the earnings per share illustrates the increase in capital productivity. Since 2020, when lockdowns triggered a global surge in digitalisation, capital productivity – the ratio between earnings and the number of shares – has been heading upwards.

Capital productivity: High earnings per share

Capital productivity: record-high earnings per share

Last updated: 19 October 2023
Source: Refinitiv, Yardeni Research, Credit Suisse

Historical performance and financial market scenarios are not reliable indicators of future outcomes.

Investment themes that are shaping the world

But what value does capital productivity offer with regard to the major themes of climate change, demographic development, resources, and urbanization? The answer is that when business, policymakers and society join forces in a common aim, great things are possible. The energy transition, as detailed in the latest IEA report, provides a good illustration of this. The efforts made in recent years have led to irreversible cost benefits and set the course for future policy.2 However, the requirements for new solutions are not only huge in the energy industry. The continued shortage of specialist staff strongly suggests that greater automation across almost all industries is essential – especially in high-wage countries such as Switzerland.

Other themes cover demographic aging and rapidly rising health costs, for example; here, cost-effective, scalable products are required that allow people to live a long and as healthy a life as possible. Bio- and medical technologies, telemedicine, healthy living services and genetic engineering have the potential to deliver on this front.

2) IEA: World Energy Outlook 2023

Economy: Long-term investment themes

28 long-term investment themes

Source: UBS

The 28 themes shown above reflect the diversity of some of the challenges we face in modern times. This marks a big moment in history for innovators who are prepared to shake up the status quo and seek better solutions – which they will undoubtedly find with the aid of risk capital. Some of them may enter the stock market as “unicorns”, while others will be taken over by large conglomerates. Their examples will be studied, emulated and attract new investors, propelling the progress to create sustainable, intelligent solutions that address the pressing issues of our time.

Thematic investments: what needs to be borne in mind

The various themes of our time offer investors plenty of potential returns. However, investors also need to bear in mind the following points:

  • “The early bird catches the worm”: for investors, this famous saying means it is important to invest in start-ups early and on a diversified basis. However, while such investments promise high returns in the long term, the risks involved are also substantial. Thus, it is worth bearing in mind that start-up investments are best suited to professional investors, while private investors are advised to seek diversification via professional venture capital funds.
  • Long-term investing: investment themes follow an economic need that supports them across business cycles. No business lives in a vacuum though. When interest rates rise, capital-intensive companies come under pressure. And when the economy is in the doldrums, no-one wants to invest in new equipment. In other words, thematic investments are also prone to the way the economic wind blows and only tend to reveal their true potential over the longer term.
  • Listed and non-listed investments: private and public equity complement one another. Both have their own distinctive features, advantages and disadvantages. However, private equity is a crucial element of thematic investing and should not be avoided. An example: by its own account ETH Zürich has a history of 500 spin-offs over the last 20 years. Its Robotic Systems Lab currently lists six robotics start-ups. Only a handful will eventually go public, as most tend to be snapped up by strategic rivals if they are successful. This also has its benefits for investors.
  • Core-satellite investments: thematic investments make an ideal add-on to a diversified portfolio. The latter usually constitutes the core portion of a portfolio. This can take the form of a personal wealth management mandate, for example. Some investors prefer to complement this type of mandate with thematic investment funds to add a personal touch to their overall portfolio.

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