By Brenda Reed.
Financial advisers often ask when is a good time to invest in global equities? The answer is almost always “right now”, as there are always interesting global themes that Australian equity managers can’t exploit.
One prevailing global theme today is how businesses managed their way through the global recession. Throughout most of 2009, many businesses, particularly in the US, were very proactive in cutting costs and adjusting to a difficult demand environment. Some firms reduced their operating costs to such an extent that a cyclical rebound is likely to lead to earnings significantly better than expected.
US industrial conglomerate Ingersoll Rand exemplifies this trend. The company’s high-quality industrial assets already generate strong cash returns, and I expect these returns to improve as revenues recover. But I also expect a change in management to result in cost-cutting initiatives and a rationalisation of its businesses, which have the potential to boost earnings further.
Embracing technology is another way that businesses have adapted to a lower growth environment. The desire to enhance productivity is pushing companies towards more long-term investment in new technologies such as cloud computing, which involves the shift of computing power to data centres. BMC Software and Citrix Systems are two US companies that develop data-centre control and virtualisation software. Omron, a Japanese company that provides industrial automation systems, is another stock in my own fund that exploits this trend. A growing focus on product quality in emerging economies such as China is boosting demand for the firm’s products.
On the demand side, underinvestment by enterprises in recent years has created a pent-up demand for PCs and other office equipment that should benefit the likes of computer firm Hewlett-Packard of the US and copier manufacturer Ricoh from Japan. Additional demand should also stem from exciting product cycles, such as smartphones and internet TV. Communications equipment business Cisco Systems, for instance, stands to gain from long-term network traffic growth that stems from the higher bandwidth requirements of video and mobile data traffic.
As demand normalises to pre-credit crisis levels, supply bottlenecks are likely to emerge in the semiconductor equipment arena, a relatively concentrated industry. Holdings such as Californian-based KLA-Tencor stand to capitalise on the lack of alternatives.
I also like some US banks. That’s controversial: but if you really look at it closely, again their management have been proactive and have already taken reserves against bad consumer debts and mortgages. We are already seeing that non-performing loans have peaked in the US and are starting to decline. We are seeing the earnings growth show through.
I have also been buying some small positions in consumer-oriented emerging market stocks where I think the long-term prospects are outstanding. Valuations are also now much more reasonable than they were nine months ago.
It’s not just companies that have to cut costs. Growing deficits are forcing governments to search for new ways to reduce expenditure, and healthcare costs are often one of the targets for belt-tightening. This is presenting opportunities for companies that have the ability to produce and distribute quality drugs cheaply. That’s why the Fund owns generics manufacturers such as Teva Pharmaceutical Industries. Headquartered in Israel, Teva is the largest generics producer in the world and has one of the best pipelines and management teams in the industry.
Where are global equities heading?
Every day I talk to companies around the world and hear what management teams have to say about their outlook for global growth, their own sales and so on. From everything I see, it still appears there is global growth.
I am really struck by how good management are seeing improving conditions. Orders are beginning to pick up, and are taking longer to deliver. We are also seeing the first signs of revenue accelerating. This, to me, bodes well for stronger-than-expected earnings’ growth, which should – over the longer-term – drive stock prices higher.
I’m finding lots of stocks in different countries that still have significant upside. I feel good about the global world of investing.
If we look at the markets over time, what we really care about is companies doing the right thing, cutting costs, growing revenues, generating good earnings and not paying a lot for them. At this point, I can find many companies that I feel are at cheap valuations.
Why should investors own global stocks?
It is not either or. Local investing is generally the easiest step for investors to initially make; they know the companies, they look through the list of companies that are held in a local fund and can identify most of them and that makes them feel more comfortable. However, I do think that investors, if they have the risk tolerance for investing in equities, should consider a global approach. This provides more companies to choose from.
There are lots of great companies out there one can invest in. Think about the emerging markets and how much those are going to grow in the future. We can also think about sectors that aren’t available in your local market and we can access those. So if you have the risk tolerance, I do think that there should be a place for a global equity fund in your portfolio. Global equity funds sit so well alongside an Australian equity portfolio all the time – including right now.
Brenda Reed is portfolio manager of the Fidelity Global Equities Fund.
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