Sobering picture from the macro, but with growth

EXTRACTS from a talk with Andrew WheatleyHubbard, joint manager of BlackRock’s Global Equity Income Fund: Where do we see the macro going? Well, from where equity valuations are at the moment we expect to see returns that beat inflation, so positive real returns.

However, when we look at the global picture we expect to see slower growth than we’ve seen in the past and there’s a bunch of reasons for this but it really comes down to the debt that caused the previous crisis. There was an awful lot of extra money borrowed going into the crisis and that money needs to be paid back.

It’s like borrowing a few extra rand every month on your credit card; you get extra growth, you get extra spending power for a while but there comes a time when you need to start paying it back and that means slightly less growth, slightly less spending power and that’s how we see the financial markets right now.

So, we see the US continuing to grow but perhaps not as fast as it has been. We see Europe as a positive growth story, we think the measures the European Central Bank has taken are sensible, it leads to a solution in the long run but it is going to remain a slow growth region.

As we look wider afield, we think there is going to be good growth in emerging markets. There is a great deal of rebalancing taking place; China is converting to a more consumption-based economy which is having an impact not only on the shape of its economy but also other economies around the world. It affects the type of resources and type of minerals that are in demand. That’s not to say there’s no demand, but that there are changing patterns.

And when you look at the core growth story of emerging markets — that emerging middle class — it is still an attractive place to be.

The more pertinent question is how to access those markets, and we think the best way to do that is not to go in directly but to buy highquality companies listed in the developed markets. Companies like Unilever, that has 50% of its turnover coming from emerging markets and arguably the best distribution network for consumer goods in India … you can capture that growth but in a risk-adjusted way, with proven management, with great brands and an enviable cash performance.

So broadly speaking, yes, there is going to be global growth, but it’s going to be slower. That means a little more volatility, a little more nervousness, which is where we think we are right now.

So, while the macro provides a sobering picture, it’s not a bad picture, there will continue to be growth … and the way to tap into it is by investing in quality stocks that pay dividends and holding on to those for the long run.

Why dividend-paying stocks? Because, invariably these are companies that having grown, having paid their employees, and having invested in new capital still have cash left over to do things with. One of them being to return cash to the owners of the company.

Investing in dividend stocks is not just about finding an income, it’s about focusing on quality.

And quality is something that’s very important to us; it’s about companies that are able to continue growing both in strong and weak economic environments; companies that are exposed to the emerging markets and have products they can price. Products that you might use every day, and despite a 2% to 3% increase in price you will carry on using — you don’t stop feeding your pet, you don’t stop taking your drugs, because of a price increase and we think this type of pricing power is important.

We don’t know what’s going to happen in the future so we want stocks that are able to withstand bad news. If there is another financial crisis we want companies that are still going to be able to grow their dividend … that can provide a reliable income stream. And so we look for companies with strong management and a resilient business model.

Putting these three things together, strength, resilience and the cash return gives us our concept of quality. But there aren’t many companies that meet all three criteria and so we go global. It doesn’t matter whether it’s a toll road operator in Brazil or a telecom in Taiwan, so long as we can invest for the long run.

Lots of people try to speculate on the market, but we have no way of knowing what’s going to happen in the short term, so we focus on the long run to lower risk and ensure a consistent income.

Dividend is more than just the cheque you receive in the mail, it is a sign of quality, it is a sign that the company is operating efficiently, is growing and returning cash.