Global vision pays
Forecasting is fraught with pitfalls and a geographical spread gives a stable base to work from
As stockpickers with a long-term horizon, we tend to avoid dwelling too heavily on politics and macroeconomics, preferring instead to focus on companies and their prospects. This is not because the former are not of consequence (they are) but rather due to the inherent difficulty of forecasting such high-level dynamics with any accuracy.
That said, we do naturally observe the world around us. In the United States, the near-unbridled optimism in markets which followed Donald Trump’s election victory appears to have come up against reality.
Most recently, expectations that a pro-business Trump would boost growth have been tempered by his failed bid to repeal Obamacare, the likelihood of a scaling back of financial regulations diminishing and the rally in infrastructure stocks (driven by his promises to ramp up spending massively) running out of steam.
Tax reform is likely to be the next major item on the agenda, and it is pretty safe to say that this won’t be straightforward.
Meanwhile, in the UK and Europe, uncertainty is heightened by the shadow of Brexit and the election cycles of France and Germany, where the spectre of populism has been haunting markets.
Of course, risk levels have been high for years, yet stock markets have taken each surprise in their stride, with global equities more than doubling over the last ten years (a period including the fallout from the global financial crisis).
There are many ingredients in the causal cocktail here, not least low – and in some places negative – interest rates, which have pushed money into riskier assets.
For us the time-horizon is critical and we are not in the business of trying to time markets – a fool’s errand at best.
Instead, we look for high-quality global businesses that are tapping into structural trends, whether it be the expanding middle class in places like Asia, the explosive growth of e-commerce or transition to a cashless society.
Critically, these companies have to demonstrate credible track records of adding long-term value for shareholders, irrespective of the swings in the political and business cycles.
As for the question of geography, it’s our belief that taking a global approach is essential to access the best opportunities.
There is naturally a temptation for investors to stay with what they know, but in an increasingly international market place, choosing to hug the home market is an arbitrary restriction.
Indeed, it’s somewhat ironic that our homes are packed with products from all over the world, yet many a UK portfolio still displays a significant home bias. Granted, there may be lingering fears about currency risk, geopolitics and so on, but there is little evidence to suggest that this negates the long-term benefits of going global.
In terms of specific stocks, global vehicle-component supplier Delphi Automotive is a good example of a quality firm that is aligned with strong secular trends.
It’s exposed to growing demand for “safer, greener and more connected” driving, and boasts growth that comfortably outpaces global auto production.
Another case in point is Hong Kong-listed AIA, a pan-asian life insurer that is well-placed in what is still an underdeveloped market, due to its distributions capabilities, capital strength and strong balance sheet.
It has demonstrated continued solid execution and is trading at an attractive valuation. n
Choosing to hug the home market is an arbitrary restriction