Value is where we find it.
At our firm, we scour the globe for the best investment ideas, seeking the soundest companies selling at the most favorable prices. However--viewing the current situation in the “developing world,” I am surprised at how many investors buy a stock or ETF simply because they have heard that the emerging markets are “the place to be.” I see companies being bid up to unreasonable P/Es, Price/Book, Price/Sales, and/or debt/equity ratios in securities of companies domiciled in nations with poor to nonexistent corporate governance, where bribery, false reporting and corruption are rampant, where intellectual and property rights are ignored, and where an investor's likelihood of restitution is close to nil. Someone is headed for a fall.
Make no mistake, some emerging markets have rewarded investors well, and some are cleaning up their act and will continue to do so. We have bought and will continue to buy some securities in some emerging markets. But all too often, one can achieve 90% to 100% of the returns they might enjoy, while experiencing only 10% or 20% of the risk they have taken on, by buying the multinational firms that are already embedded in those nations, that have long-term relationships there, and that keep their ear to the ground for any sign of trouble.
The US has hundreds of companies deriving a large percentage of their sales and earnings from emerging markets, as do many other developed nations. Before you become enamored of going directly to the source and entrusting your nest egg to some emerging nation’s accounting practices, may I suggest you learn your A’s ‘n’ B’s ‘n’ C’s of international investing.
We have become accustomed to the acronym BRICs, meaning Brazil, Russia, India and China, used as exemplars of accelerated growth in many emerging markets. Allow me to add my own acronym, based upon the fertile fields I search (in addition to the USA) when seeking companies with global franchises domiciled in nations where the rule of law and corporate governance are paramount and the accounting standards uniformly the best. I refer to (A) Australia, (S) Switzerland, (N) Norway, (B) Britain (OK, I cheated, but A’s 'n' UK’s 'n' C’s just doesn’t have the same ring,) (S) Singapore, (N) New Zealand, (C) Canada, and (S) Sweden.
If Brazil, Russia, India and China are exemplars for the emerging markets to emulate, then surely the US, Australia, Switzerland, Norway, Britain, Singapore, New Zealand, Canada, and Sweden are all worthy of emulation for good corporate governance and an environment that respects free trade and business without borders. This group, coincidentally, also covers every one of the "G10 currencies" except the euro and the Japanese yen. Add a dollop of Eurozone and Japanese companies and you’ve pretty much covered the waterfront.
The reason three of these are in bold is because they have bigger, broader markets than the others, with considerably more multinationals manufacturing in, servicing, or selling to emerging markets. While also worthy of consideration for our investing dollars, we acknowledge that Singapore, New Zealand, and the others in regular typeface don’t have the same breadth of market that, say, Australia, Britain, Canada and the US do.
Wondering if you can really get great representation in the emerging markets via companies domiciled in (what I consider) safer and more transparent jurisdictions? Well, let’s see. In Aerospace and Defense you could buy Brazil’s Embraer (NYSE:ERJ), #1486 of the Forbes 2000 biggest global contenders. Me, I’d rather own America’s Boeing (NYSE:BA) (#120) or Britain’s Rolls Royce (OTCPK:RYCEY) (#283) or BAE Systems (OTCPK:BAESY) (#530). In Banking, you can buy China’s ICBC. Me, I’m way more comfortable with Australia’s ANZ Banking, Britain’s Barclay’s (NYSE:BCS), Canada’s Royal Bank of Canada (NYSE:RY), or Sweden’s Nordea (OTC:NDBAY). (All, including ICBC, are among the Top 100 Global Companies on the Forbes 2000 list.)
For big durable goods, I’ll take Switzerland’s ABB, the US’s Caterpillar (NYSE:CAT) and Deere (NYSE:DE), or Sweden’s Sandvik (OTCPK:SDVKY) over China’s much smaller contender (at #1097), China CSSC Holdings. We own some China Agritech (OTCPK:CAGC), a fertilizer company, as well as the US's Mosaic (NYSE:MOS) but that’s because Norway’s Yara (OTCPK:YARIY) (a former holding) and Canada’s Potash Corp (NYSE:POT) have zoomed too high in price. In Health Care, I could find only one BRIC entry, India’s Sun Pharma Industries, in the Forbes 2000. It is dwarfed, as I imagine its sales may be, even within India, by the bigger and better-known US, Brit and Swiss health care titans. (Israel’s Teva (NYSE:TEVA), Switzerland's Roche (OTCQX:RHHBY), Britain’s GlaxoSmithKline (NYSE:GSK), and France’s Sanofi-Aventis (NYSE:SNY) are all in our portfolios or on our watch list right now…)
I’m not certain where the BRICs and other emerging markets are buying their insurance, without which no business can grow to any size, but with the exception of China Life (NYSE:LFC), it isn’t at home. The few companies that make the list from the BRIC nations are dwarfed by the size and I presume the premiums collected by Switzerland’s Zurich Financial, Britain’s Prudential (NYSE:PRU), Canada’s Manulife (NYSE:MFC), Australia’s QBE (OTCPK:QBEIF), and a whole host of US giants. In the Materials business, at last, we come to greater parity. Australia’s BHP Billiton (NYSE:BHP) is the biggest, followed by the UK-Australian Rio Tinto (NYSE:RIO), but Brazil’s Vale (NYSE:VALE) is #3 and there is a great mix of A’s ‘n’ B’s ‘n’ C’s as well as BRICs after that, with, of course, a few Russian state-controlled biggies in the field.
Let’s leap into the Oil Patch. In oil, gas, and services for this sector, there are giants from everywhere. Our favored ExxonMobil (NYSE:XOM), which we add to whenever it declines, is the biggest, of course, followed by Shell (NYSE:RDS.B) and BP. Then comes PetroChina (NYSE:PTR), Russia’s Gazprom (OTCPK:OGZPY), Brazil’s Petrobras (NYSE:PZE), before, a few numbers down, Norway’s Statoil (NYSE:STO) beats Russia’s Lukoil (OTCPK:LUKOY). In every single one of the sectors already discussed, where a firm is domiciled does not mean the bulk of their revenues come from there. This is nowhere more true than in the energy sector. Norway’s Statoil is in the Canadian tar sands, Russia’s Gazprom is all along the Russian periphery, India’s Reliance Industries is exploring in far-flung destinations, and Singapore’s Keppel (OTCPK:KPELY) and Norway’s SeaDrill (OTC:SDRLF) are producing and operating platforms worldwide. One of our most recent purchases, France’s Total Petroleum (NYSE:TOT) is extending its reach far beyond the old French colonial states and into more distant corners of the globe.
I could go on, but the picture is the same in technology, transportation, utilities, et al. One simply does not have to walk off the risk gangplank to find the “efficient frontier” for emerging and frontier markets.
By stressing safety from major political risk, confiscation, corruption, etc., I believe you are more likely to enjoy outsized returns in the market, by owning some of the best names from around the world, with a focus on those domiciled within the relative security of stable capitalist democracies.
Full Disclosure: We, and/or those clients for whom it is appropriate, are long MOS, RHHBY, SNY, MFC, QBEIF, XOM, RDS.B, STO, SDRL. and TOT.
The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.
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