Q&A: The case for 'international' strengthens
Audrey H. Kaplan, senior portfolio manager and head of global equities, shares her outlook for international investing opportunities going into 2013.
Q: What countries appear to be well-positioned as we close out 2012 and enter the New Year? Our highest-conviction investments in Europe are located in northern German, Norwegian and Danish economies. We believe that German corporate fundamentals, particularly, will be a key driver of stock price appreciation and that German shares will benefit from continued low ECB rates and low unemployment. We are overweight Norway because the country has strong public finances and is benefiting most from the boom in off-shore oil and gas drilling.
Elsewhere, we favor the Latin American economies, especially Mexico and Brazil, and prefer South Korea and China in Asia. These are countries with strong growth prospects, attractive demographics, solid sovereign balance sheets (low debt/GDP, current account surpluses, etc.) and growing domestic consumption.
Particularly with regard to China, where we recently moved to our highest weight in four years, we feel the markets are not acknowledging the significant amount of flexibility the government has from both a fiscal and monetary perspective to stimulate economic activity. While pockets of China’s economy may be slowing, we believe that China’s domestic economy is strengthening due to a growing middle class and that many segments of China continue to experience an economic upturn.
Q: What sectors/securities appear attractive within favored countries? Similar to our view on country selection, where the most financially stable countries are the most attractive, the companies we prefer in Europe tend to be larger-capitalized, global institutions with growing businesses and revenues streams outside of the EU. Particularly as long-term investors, we feel that fundamentals of a company must be supportive of growth. We expect the winners to maintain higher profitability and gain market share, while the companies we avoid will continue to struggle in the slow growth environment.
In fact, many of our companies are export-oriented firms with a significant bias to the industrial and consumer discretionary (luxury goods, auto makers, select retailers, etc) and consumer staples sectors (e.g., food and beverage companies) that are benefiting from the expansion of the middle class in the emerging markets.
Overall, we are ending this year with overweight positions in global capital goods and Asian technology.
Q: Can you discuss some of the risks and potential rewards that newcomers to international investing should know? Many of the world’s largest international markets are similar to the United States, so the greatest risk tends to be from currency fluctuations. As investors move toward more developing or even frontier markets, the risks increase as do the potential returns. In less developed markets, the risks investors face include but are not limited to political stability, legal system, currency, accounting and liquidity.
While there are risks, there are also numerous rewards. Investing globally provides a world of investment opportunities. There are more opportunities for growth overseas. In some cases, economies are booming. For example, even though headlines point to a “slowing” China, we anticipate an 8 percent GDP growth in 2013, which exceeds the current consensus for 2 percent real GDP growth in the United States next year.
Moreover, investing overseas provides opportunity to diversify U.S. political, regulatory, and even the dreaded “fiscal cliff” worries and risks. Plenty of overseas companies offer innovative products. Finally demographics are a key reason to invest overseas—countries where the population and workforce are growing, tend to outperform over time.
Thank you, Audrey.