Call it what you will, jingoism, xenophobia, isolationism, protectionism, nationalism, many countries are under attack from the left and right by those who embrace provincialism over globalization.
Many Calls to Turn Inward
Great Britain, once the global power, fell victim to the siren's call of provincialism last week in its Brexit vote to leave the European Union. The movement was led by the U.K. Independence Party (UKIP) with support from elements of the country's Conservative and Labour parties.
Similar forces have gained strength in other countries. Factions in France and other EU 'partners' are calling for exit votes. Wings of the Democratic and Republican parties want the United States to get tough on trade, turn away some foreigners, build walls, and "Take back our country". China has devalued their yuan.
The move is no less pronounced on a regional level. Scotland is in favor of remaining in the European Union and now, with England exiting, voices are calling for yet another vote on independence. Catalonia has wanted to split from the rest of Spain; the Quebecois from English-heritage Canada. Texans never seem to stop talking about their state's right to secession as now labeled "Texit". The list goes on and on.
Now before the hateful comments start coming, mind you I am not arguing one political ideology over another. I am simply pointing out the fact that voices of protectionism/separation are all around us. Therefore, I recommend taking a few minutes to think about this phenomenon from an investment standpoint.
The Problem with Provincialism
Although this group or that may feel a power rush from jingoism, xenophobia, isolationism, protectionism, nationalism - again, whatever characterization you prefer - these constructs don't work from an economic/financial perspective. Why? Because one country's politics cannot dominate international commerce for very long and, in fact, it can be counterproductive. Two quick examples:
For those not familiar with it, Smoot-Hawley, the Tariff Act of 1930, was a protectionist response to the onset of the Great Depression. The legislation, signed by President Hoover, imposed high import duties on thousands of goods. The trade retaliation that ensued severely damaged the US economy raising unemployment and prolonging those dark times.
And, if this doesn't convince you, think about how well the oil cartel OPEC has been able to protect its position in light of deep sea and horizontal drilling, shale and fracking, oil sands, and alternative energies including wind and solar. OPEC is in shambles; it doesn't matter if it's formally disbanded because the competition and the markets have already done the job.
Sealing oneself off, or drumming others into submission, just doesn't work very well financially/economically for very long because, again, global forces are beyond the ability of any country or alliance to control. International commerce will prevail; it is naïve to believe otherwise.
Investing into Globalization
In the wake of Brexit and other calls for retreat, what's an investor to do? In three words: Invest into globalization - rise above it all and, whether through debt or equity, put your money into companies that are in the best position to survive and thrive politics notwithstanding. Invest in transnational corporations with large global footprints and dominant competitive positions that are sustainable because, among other things, these firms have the capability to move dynamically among and between ever-changing political constructs.
Consider this. Whatever you think of Iran, its military intentions and politics surrounding all that, the US and other Western government decided to lift sanctions earlier this year. Within a few months, Boeing (NYSE:BA) announced a 100-airplane sale to Iran. Now, just to drive home the point of how nutty the political discourse is around this, consider that the very same voices who denounce the deal as the US consorting with the enemy are those who constantly pound the table for creating and keeping jobs at home; ugh. Boeing, as one of many fine transnational companies, is able, more or less in real time, to reengage business with a country that was on everyone's political sh-- list not even a year ago.
Those who have read my earlier articles know that, "I [generally] only invest in global companies that have the power to really capitalize on major shifts but also offer downside protection in the form of diversified product lines, sophistication with foreign exchange, and so forth." The provincial political climate that we find ourselves in convinces me more than ever that this approach is viable. If and when everything else goes to hell, business will be done. The UK and the rest of Europe may revert to feudalism, but British Petroleum (NYSE:BP) will go on, as will Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B), as will GlaxoSmithKline (NYSE:GSK), as will Sanofi (NYSE:SNY) and Suez (OTCPK:SZEVY) and Veolia (OTCPK:VEOEY) in France, and Bayer (OTCPK:BAYRY) in Siemens (OTCPK:SIEGY) in Germany, and Eni (NYSE:E) in Italy, and others.
Indeed, arguably, transnational firms might well become even stronger as the result of provincialism. Here's a scenario for why: As a result of Brexit, the English Pound sank to 30-year lows. English exporters are no doubt jubilant as their products are now relatively cheaper internationally. However, England dealt a blow to importers including those that rely heavily on commodities, raw materials and semi-processed goods bought overseas and consumed at home or used in the manufacturing of products to be re-exported. This could be fatal to small-to-mid-sized British businesses but probably not to transnational companies that can shift operations elsewhere and otherwise have the sophistication to move forward. They're even likely to pick up some market share along the way as they often do during recessions.
As to types of industries, I am drawn to those that supply things that people really need no matter what - defense, energy, food, health, water, and major firms that support these primary industries. They include companies such as Chevron (NYSE:CVX) and Exxon (NYSE:XOM) in the integrated energy space, pharmaceutical companies like Johnson & Johnson (NYSE:JNJ), Lilly (NYSE:LLY), Merck (NYSE:MRK), and Pfizer (NYSE:PFE). In food, Bunge (NYSE:BG) would be on the list. As for defense contractors, General Dynamics (NYSE:GD), Lockheed Martin (NYSE:LMT), Northrup Grumman (NYSE:NOC), Raytheon (NYSE:RTN) and BAE Systems (OTCPK:BAESY), another British company but important to the US military. Not to forget General Electric (NYSE:GE), IBM (NYSE:IBM), and Accenture (NYSE:ACN) as corporations that provided critical products and services to other transnationals.
As for the types of companies to avoid during these topsy-turvy political times, first and foremost major commercial and investment banks. Investments in such European firms are collapsing following Brexit because of counterparty risks; very scary. Less so, I suggest steering clear of retailers and gadget companies. Both industries rely on discretionary income and have short product life-cycles meaning that their competitive positions are tenuous during uncertain times.
At the End of the Day
Needs-based business will go on notwithstanding the politics of this country or that, left of right. Therefore, it stands to reason that transnational companies are central to any investment strategy, especially now.
Disclosure: I am/we are long ACN, BA, BAESY, BAYRY, BG, BP, E, GD, GE, GSK, IBM, JNJ, LLY, LMT, MRK, NOC, PFE, RDS.B, RTN, SIEGY, SNY, SZEVY, VEOEY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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