Close this search box.
News & Insights
Jan 23 2024
Notes from the Road

4Q23 Notes from the Road

URL copied to clipboard

Company Touch Tracker

This quarter our team engaged with 350 companies across the world, putting our total company touches at 1,567 for the year.

This past quarter, analyst teams traveled domestically to Tennessee and Florida. Internationally, team members traveled to Taiwan, South Korea, China, Japan, Canada, Italy, Switzerland, Belgium, Sweden, Germany, the United Kingdom, and Australia. One Portfolio Manager spent nearly 3 months living in Beijing, China. Here are some findings from our visit to Germany.

Germany Recap

Juliette Douglas, Portfolio Manager of Global Reach and International Opportunities, Alexis (Alex) Watson, Research Analyst, and Sam Gardiner, Research Analyst, met with 15 companies during their week in Germany. Company visits included names we currently own in our portfolio as well as names held on our watch lists that may benefit from an updated company touch.

Here are some key thoughts from Alexis Watson about the team’s visit:

Germany is a difficult country for me to figure out culturally. It’s right in the center of Europe and shares a border with Denmark, Poland, Czech Republic, Austria, Switzerland, Finland, France, Luxembourg, Belgium, and the Netherlands. Perhaps this explains why it feels a bit like a cultural melting pot. You get a bit of the Dutch candidness, the Eastern European practicality, the Swiss architecture, and perhaps some pockets of French charm… but that last one is questionable.

Traveling for work in Germany is not for the faint of heart nor the organizationally challenged.  Companies are distributed throughout the country.  My efficiency-loving side seriously appreciated the autobahn.  Having Juliette and Sam as travel companions was excellent given the hours we spent driving together.  A few drawbacks of the trip included the alarming narrowness of their under-construction freeway lanes, and the fact that German food is not my favorite, unless it’s some type of bread.  We started our trip on the northwest side of Germany, with one meeting in the Netherlands, and then made our way down the west side of the country and ended our trip in the South.

We met with a variety of companies, across all sectors except Consumer, which is not surprising. Germany is known for its manufacturing, and our trip included a fair number of factory visits and Industrial company visits.  After we visit a company, our team gives an initial score from +5 to -5, based on our expectation for the company to outperform in both relative and absolute growth terms. We then average the team scores and rank our visits as a way of prioritizing our follow up work when we get home.

What I found interesting about this trip was how narrow our range of scores was, and how skewed they were to the lower end. No single company had a collective score above 3. The companies with better numbers were generally on the expensive side, while the cheap companies had quality issues such as unprofitable products or segments and often a lack of margin expansion opportunity. In other words, the German market feels pretty efficient.

We always appreciate how forthright the management teams are in Germany compared with other markets.  As we met with various companies, the sentiment regarding the demand environment was varied.  Most of the “Industrial-esque” companies said they were already seeing a slowdown or expecting to see a slowdown next year.  Additionally, compared with previous visits, we heard an increasingly negative sentiment regarding China as companies adjust expectations for Chinese demand downward. Some German companies have reconsidered their approach and access to the Chinese market by changing product configurations to protect intellectual property or by disengaging their selling or distribution operations there.

Looking back, it was only about one year ago when the market was quite negative toward Germany given the uncertainty related to energy prices/supply and the upcoming winter. The country was more resilient than expected through 2023 and the DAX[1] had a nice recovery before flattening out in June. Today, sentiment around Germany is more positive as more investors seem to be expecting a softer landing. However, the government is struggling with a mounting debt crisis. German bylaws have a hard debt limit, which was suspended during the pandemic under an emergency escape clause. Some public officials/bodies hoped they would be able to take advantage of the temporary, increased debt limit beyond the Covid era by redistributing previously allocated Covid-related funds to other projects, including the green transition, industrial modernization, and even aid for Ukraine. However, a top German court recently struck down this redistribution of funds, saying the allocations didn’t qualify for the emergency funding. Now the government is scrambling to cut spending since they can’t expect to receive the Covid-related funding.  I do admire the strictness of the German bylaws that are in place to ensure long term financial stability, while also checking my personal bias against big governments. In Germany, there is a constitutional requirement for a balanced budget while the US has a more laissez-faire approach to spending, frequently running deficits, which can’t end well if it continues in excess.

Overall, I left Germany with a neutral investment sentiment, on both a macro level and a company-specific level. On one hand, you have a large, developed economy with significant manufacturing infrastructure, process-oriented expertise, and decision makers who are often fiscally conservative. But the other side of there is the potential weakness of an industrial downturn, hovering over what may be a bit less innovative and growth-oriented culture, historically speaking.  We didn’t leave feeling significantly more negative on any of our owned names but also did not come away with any new, high conviction buy recommendations.

[1] The DAX is a stock market index consisting of the 40 major German blue-chip companies trading on the Frankfurt Stock Exchange.