International Opportunities Abound, But Careful Research Required

Charles Paikert Contributing Editor New York 12 July 2011

International Opportunities Abound, But Careful Research Required

Opportunities abound in international markets, but look very, very carefully before you leap, was one conclusion to come out of a recent panel discussion in NYC, hosted by S&P and partnered by ClearView Financial Media, the publisher of Family Wealth Report.

Opportunities abound in international markets, but look very, very carefully before you leap, was one conclusion to come out of a recent panel discussion. It was also said that caution is leading portfolio managers and equity strategists.

“In a world of uncertainty, selection is key,” said Stephan Biggar, head of equity research for Standard & Poor’s, who chaired the discussion in New York, Opportunities for International Investors and Advisors to the Non-Resident Alien market, hosted by S&P and partnered by ClearView Financial Media, the publisher of Family Wealth Report.

Indeed, successful navigation of the volatile international markets requires careful analysis of macro economic trends, equity and fixed income markets and individual companies, panelists agreed.

“Not all international markets are created equal,” Biggar said in an interview. “You’re going to find pockets of strengths and weakness.”

The former includes countries with strong commodity industries and those who “have anything to do with China,” he said, citing Australia, Brazil and Canada as examples. But investors shouldn’t overlook smaller countries either, Biggar declared.

As examples he cited Singapore’s “strong growth rate and stable government” and Taiwan’s “thriving semi-conductor market.” By contrast, Biggar said investors may want to be wary of Japan and European countries dealing with austerity measures that impair growth such as Greece, Spain and Portugal.

Investors should focus on companies with strong dividends and be vigilant when selecting international fund managers, he urged.

“Approximately 75 per cent to 80 per cent of actively managed mutual funds do not outperform the S&P 500 on an annual basis,” Biggar said. “Investors have to have a high degree of confidence in who they select and look carefully at their track record, tenure and global perspective. Those managers have to be able to avoid the pitfalls of markets that aren’t growing, have unfavorable exchange rates and restrictive local government policies.”

Macro risks

In fact, persistent macro risks are fueling increasing global equity volatility, while global bond yields are declining amid fears of weaker growth, noted Alexander Young, international equity strategist for S&P.

Global monetary policy is tightening, Young said, and at the same time global manufacturing and service sector momentum is deteriorating, while European sovereign stress is intensifying. As a result, he told the attendees, the sustainability of the global earnings per share rebound has been thrown into doubt and investors are balking at further multiple expansion.

Despite these bearish indicators, Young said in an interview that he does expect the global market to ultimately continue to go up, and the S&P 500 to eventually hit 1,400, albeit via a “very choppy” ride led by large-cap stocks.

At this stage in the bull market and global economic cycle, Young said, investors should focus on companies with high dividend yields and strengths in industrial markets and consumer staples.

Franklin Templeton’s Global Growth Fund investment criteria includes growth (determined by free cash flow analysis); quality (determined  by capital return and management analysis) and valuation (determined by a common discount cash flow/dividend model), said lead manager Donald Huber.

As case studies, he cited Australia-based Cochlear, which manufactures and sells cochlear implant systems for the hearing-impaired and Hong Kong-based Li & Fung, an export trading, logistics and distribution company that works with retailers like Wal-Mart and clothing manufacturers like Tommy Hilfiger.

Cochlear, according to Huber, is expanding in both emerging markets where pediatric hearing impairment is often not treated and in developed markets with aging populations where severe hearing loss is under-treated.

As a result, he said, Cochlear is a dominant industry leader in an under-penetrated market and is widening its lead over competitors due to scale and R&D investment. Li & Fung, Huber said, is the world’s largest independent sourcing company and is well-placed to grow through consolidation and increased opportunities from both retailers and consumer goods.

Underlying drivers

Even though Li & Fung is headquartered in China, it generates most of its revenues in the US and Europe, Huber noted.

“As companies expand into new geographic markets, the traditional way of looking at portfolio diversification – based on where a company is headquartered - becomes less meaningful,” he explained. “If an investor is looking to build a diversified portfolio, it may be more productive to consider the underlying economic drivers for a company, including where revenues are generated, as opposed to the traditional approach.”

Emerging markets fixed income has also presented opportunities for international investors, according to Marco Santamaria, portfolio manager for AllianceBernstein.

The asset class has attracted large investor inflows partly due to ample global liquidity, but also due, Santamaria said “to real improvements in credit quality.”

There are incipient elements of exuberance in emerging markets fixed income, he said, but also evidence of “real maturation” in the space. As a result, “increasingly sophisticated investment strategies” are poised to take “full advantage” of opportunities in emerging markets, Santamaria maintained.

Alternatives also represented opportunities for international investors, said Timothy Schuler, senior vice president and investment strategist for Permal Asset Management.

Guy Boden, director of S&P Fund Research, concluded the panel presentation by describing when and how to use qualitative research to support offshore fund selection.

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