by Catriona Burns
It is a well-known fact that the portfolios of many Australian investors are not geographically diversified.
In recent years, some investors have used passive funds to provide access to global markets. Noting the current US equity bull market recently passed its ninth anniversary, increasingly opportunities exist in identifying individual stocks with compelling business characteristics rather than riding the vagaries of entire markets.
Active investors can also gain exposure to specific companies that are set to benefit from such trends as automation, electrification, e-commerce, mobility, food scarcity and rising wealth in regions like China and India. They can access major global regions simultaneous economic growth while taking advantage of equity market volatility to time their entry and exit.
The question is, with an overwhelming number of potential investments in global markets, where do you start? In Australia and offshore, we aim to invest in undervalued growth companies, immediately screening out companies that do not demonstrate both value and growth.
From a refined list, we then look for companies that have strong management teams, favourable industry dynamics, solid earnings growth potential and compelling valuations. Importantly, we only invest when we can identify a catalyst that we expect will change the company’s share price.
We have identified some key regional themes that are driving global investment opportunities.
We believe the underlying economic conditions in the US are currently positive. While the Tweet-driven US President has created a certain level of volatility in geopolitics and financial markets, the White House tax cuts and changes to rules around repatriation of company’s offshore cash have been highly stimulatory to the economy. This has resulted in higher wages or one-time bonuses for employees, greater capital investments by corporates and increases in buybacks and dividends for investors.
With strong economic tailwinds for corporate earnings and mispricing opportunities arising from volatility associated with fears around the pace of interest rate increases, the US holds a range of opportunities. One particularly interesting company is Sensata Technologies. Sensata manufactures sensors for automotive, heavy vehicle and other industrial applications. Key drivers for the business are mandates for cleaner and more efficient vehicles, modernization of the fleet in China and further automation and electrification of vehicles.
Europe and the United Kingdom
Amid the mixture of political challenges facing the United Kingdom and Europe the region presents many investment opportunities, particularly in France, Germany and Switzerland. Positively, French President Emmanuel Macron is attempting to reform the country’s labour code, which has historically hindered some French company’s flexibility and impacted their global competitiveness. Companies of interest in France include call centre business, Teleperformance, and commercial services operator, Elis.
Based in Germany, which has been Europe’s economic powerhouse, Scout 24 is the Realestate.com and Carsales.com of Europe. The former chief executive of REA in Australia is leading the company and is on the path towards replicating his extraordinary domestic success.
Swiss branded consumer goods company Logitech stands out given its high levels of innovation, strong brand and market position, quality management team and net cash balance sheet. Given its alignment with Apple and Amazon it is well placed to grow over coming years.
Japan is gradually emerging from the two “lost” decades. Japan’s economy has experienced a persistent lack of inflation, low growth and suffered from the challenges of an ageing population and high public debt. While the overall economic picture is mixed, the country is benefiting from Prime Minister Shinzo Abe’s stimulatory economic policies and inflation is gradually picking up. A significant positive development, and a dramatic change from the past, is that domestic shareholders are increasingly willing to put pressure on company management if their returns are not satisfactory. Green shoots are most obvious in the major cities such as Tokyo, Osaka and Kyoto, where net migration is positive and further stimulation will come in the form of infrastructure and tourism spend associated with the 2019 Rugby World Cup and 2020 Olympics.
One exciting company that stands to benefit from this dynamic is small-cap property developer Open House Co Ltd. Given the weak economic backdrop of the past, a large part of the Japanese housing stock is incredibly dated, with many over 20-years old and in need of refurbishment or replacement. Open House is well placed to benefit from this redevelopment opportunity, with earnings set to grow 20 per cent this year and next, and the company trading on a multiple of 11 times earnings.