Secular growth themes: shopping, health
Portfolio Manager Tom Banks explores two secular growth themes for international investors.
Published October 22 2018
I'm Tom Banks. Portfolio Manager at Federated Investors.
Given that much of the global economic strength is centered in the U.S., why invest internationally now?
First reason to invest internationally now, is because the markets are on sale. When we look at forward multiples compared to the United States, the Eurozone is currently trading at a 28% discount. The range has varied between 10% and 35% over the last decades. So, we do believe on a relative basis, we're starting to reach trough levels. The second point is, we believe the growth disparity that we've seen in the last year between the Eurozone and the United States will begin to narrow. We believe a lot of the overhangs, that have been impacting the growth rates in the Eurozone are temporary. And also the United States will begin to lap the benefits from the Tax Reform Program, that's really been a big beneficiary to their growth. Finally, we believe the market underestimates the long-term growth opportunity, for international countries. A lot of people don't realize this, but fifty years ago the United States was 6% of the world's population and 40% of the world's GDP. Now the United States is only 4% of the world's population and 25% of the world's GDP. As growth rates begin to converge between the two markets, the market will begin to start focusing again on the attractive long-term fundamentals that international equity markets have to offer.
Where are you finding international investing opportunities?
Within the international group at Federated, we're bottoms-up investors. So that means we're always starting our analysis at the company level. That doesn't mean that there aren't secular growth themes that we have identified. And if we are able to find companies that fit into the secular themes, it adds to our level of conviction. Two themes that we're pretty bullish on right now, are the shift from brick and mortar retail to online. And the second is in increase focus on health and wellness. So, you might be thinking that the shift from brick and mortar to online is already played out. I know that we've been able to transact online for the last 15 years. And also we've all been reading the headlines about the death of the mall. The reality is, when you look at the data, penetration levels are still low. What might surprise some people, is that the United Kingdom is actually the most developed market for online retail. The penetration rate there is 18%. The United States is half of that, at 9%. And most other countries are even below where the U.S. is. We think over the long-term, this ratio will get to over 50%. So we think that even though we're a decade into this shift from brick and mortar to online retail. We think globally, this is a multidecade phenomenon that has a lot more growth to go. The second opportunity I mentioned, health and wellness, that's obviously a very broad term. A lot of different ways to play that. We prefer to play it through the ingredients base. So we own a company that's based in Ireland and another that's based in Denmark, and both these companies work with leading multinational food companies. In coming up with clean labeling. So, basically replacing artificial flavors with natural ingredients. And we think that this is also a sustainable trend over at least the next few years.
Views are as of 10-10-2018 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards. Federated Global Investment Management Corp. 18-76466 (10/18)