Beyond the Economic Cycle
Coverage of the 2016 Global Investment Conference
BY Yaelle Gang | December 14, 2016
Allocation by Canadian plan sponsors to global equities is growing, but it may be better to look at specific companies from the bottom up for opportunities, instead of getting too fixated on borders, according to Yasmin Landy, institutional portfolio manager at Fidelity Investments.
During her presentation, Landy outlined how, historically, the equity performance leadership of international and U.S. markets has been cyclical. “Picking your spots and being aggressive during market dislocations is actually quite important,” she explained.
Landy admitted that choosing the right time to shift geographic allocations can be very difficult; looking at improvements in earnings per share growth may be the best way to spot opportunities to enter a market, since it is most correlated to stock performance compared with valuation or GDP growth. Or maintaining an allocation across geographies consistently, but with a company or sector focus.
“The industry we’re investing in is going to be the most important aspect (versus country),” Landy said. “And there can be a very big difference between the local economy’s drivers and what is actually available in an exchange-traded fund or available in a public market.”
She identified some country-specific drivers of corporate earnings growth that investors can keep their eyes out for: operating cost trends, credit availability and cost, innovation and pro-business government policy. By looking at these company-specific factors instead of macroeconomic factors, investors can potentially find good businesses that are exposed to the kind of structural trends that can provide topline growth, potentially at a compelling valuation.
For example, lower operating costs can increase profitability. Companies operating in countries dependent on imported oil may benefit from a decreasing oil price, whereas companies operating in countries with rising labour costs may suffer. These factors can shift the cost structure and impact earnings potential.
Corporate growth can also be accelerated by ample liquidity and low interest rates — both can help improve profitability as companies can refinance their balance sheets with more sustainable and lower funding costs, or enable consolidation through mergers and acquisitions.
Investors should also look to company-specific analysis to gain access to global mega-trends. Landy explained that, in the area of memory technology, the number of transistors in a semiconductor chip roughly doubles every two years; the leading manufacturer meeting the demands of this trend is based in Taiwan. You would miss it if you weren’t looking overseas, but the drivers of earning growth are structural and global in nature, and less related to the Taiwanese domestic economy.
Landy also used Denmark as an example of a country where overall GDP growth has been lower than the global average, but stock market performance has been well above average — because 33% of the Danish public market is made up of a company called Novo Nordisk, which provides diabetes treatments. The company is propelled by market leadership and a huge addressable market because diabetes is growing worldwide. Hence, there is strong demand for treatment. This is another case where company and industry specifics far outweigh the domestic economy when thinking about the investment potential.
“If you can find companies that can have strong structural growth drivers, that is perhaps a better way to think about generating returns today, where global growth is challenged,” Landy said.