One of the current great debates is whether or not the slow down in the US economy will torpedo growth in ex-US economies. Most analysts tend to take an all or nothing view. One camp says that economic growth in countries outside the US is bound to disappear given the sharp US decline. The other camp contends that strong growth in places like Asia will continue on unabated.
Of course the more likely outcome is that something in between will occur. The US slow down along with the lower dollar will take away some sales from ex-US companies with large markets in the US. For US based companies with markets outside the US, the low dollar represents an opportunity There is also a large and growing amount of worldwide trade that does not directly involve the US. For example imports from China to Europe increased from 75 billion Euros in 2000 to over 195 billion Euros in 2006.
On an overall basis the new world economy is much more diverse and dynamic than it used to be. The number of regions with new wealth and a growing consumer class has seen unprecedented growth. This new diversity and dynamism is very healthy and should clearly act to buffer any monolithic worldwide slow-down.
Another current investing myth is that mid and smallcap US-based companies are poor investment choices in the new worldwide economic environment. The rationale put forth for this argument is that mid and small cap US have a low proportion of revenue outside the US. The myth is that they do not have the understanding of ex-US markets or the capabilities to exploit them. On the contrary I am finding that many mid and small sized US based companies are doing very well outside the US.
My long term investment preference is for smaller companies that have the opportunity for large future growth. I have been finding a number of great US based companies with market caps under $5 billion that have a large and growing proportion of revenues from outside the US. These companies are finding the markets, developing products and services for those markets, and they are navigating the regulatory and cultural issues to succeed outside the US. Here is a list of some of these dynamos:
- Harsco (HSC) – a provider of services to the steel, construction and railway industries derives 70% of its revenues from ex-US countries.
- Watson Wyatt Worldwide (WW) – a provider of benefits and financial counseling services has offices in 32 countries. Over 40% of sales come from outside the US.
- Jones Lang LaSalle (JLL) gets over 72% of its real estate management and investment services from outside the US.
- Trico Marine (TRMA) derived 74% of 2007 revenues from international operations and has key strategies to expand this. The company is also seeing great recent benefits from more favorable Norwegian tax treatment.
- Woodward Governor (WGOV), the turbine and power company has 52% of sales from ex-US sources.
- Atrion (ATRI) a producer of medical products increased ex-US sales from 30 to 36 % going from 2006 to 2007.
The new globalism challenges companies to compete on a worldwide stage. Many small and mid-sized US companies are stepping up to the challenge. We also think that with the lower dollar these types of companies could be attractive take-over targets in the coming months.
Disclosure: We own shares in all of the above companies in managed accounts at Freedom Mountain Investments.