2012 Issue 1
Despite the perception the world is in an economic downturn, there are investment opportunities if you know where – and how – to look.
With ongoing turmoil in many Western economies and selective opportunities in emerging markets, now might be an opportune time for institutional investors to view global investing through a slightly different lens. Rather than emphasizing country- or region-specific investments, investors could benefit by focusing on a broader global approach that encompasses smart global companies.
“Nimble global companies have the ability to move from unfriendly geographies toward promising opportunities and demographics – and they can do this at an advantageous cost,” explained Jim McDonald, chief investment strategist at Northern Trust. “In this environment it is especially important to understand macro geographic and economic instability in the world, but global corporations can spot emerging market growth and act decisively, and quickly, to capitalize on those opportunities. Investors can benefit from following their lead.”
“Nimble companies have the ability to move from unfriendly geographies toward promising opportunities and demographics – and they can do this at an advantageous cost.”
— Jim McDonald, chief investment strategist, Northern Trust
Wayne Bowers, chief executive officer, asset management, EMEA and APAC, Northern Trust, cites the example of emerging markets.
“Many emerging economies are not dependent on Western investment, which gives them the flexibility and luxury to have a multi-decade investment plan. Any place in the world where you see shifts toward better education and moves from blue-collar to white-collar employment, you see spending power unleashed,” Bowers said.
Institutional investors should consider awarding broader investment mandates ... and incorporating global companies – those that have insights into emerging global trends and areas of economic opportunity – into their portfolios.
It’s also significant that emerging market capitalization across the world “has gone from single-digit to double-digit in the past 10 to 15 years” and will form a bigger portion of the global market for equities, Bowers noted.
Smart companies – and smart investors – should watch that evolution closely.
As 2011 neared a close, growth projections for the world economy churned and investment experts worldwide predicted a grim New Year.
In late November, the OECD cut its estimate for 2012 global growth to 3.4% from its previous estimate of 4.6% in May. In revising its forecast, the OECD noted the Eurozone had entered a mild recession and there was the possibility that the United States might also.
“Any place in the world where you see shifts toward better education and moves from blue-collar to white-collar employment, you see spending power unleashed.”
— Wayne Bowers, chief executive officer, asset management, EMEA and APAC, Northern Trust
Although an understanding of global demographic and economic trends should be the foundation for any global investment strategy, investors could miss attractive opportunities if they remain too focused on the big picture. “Some investors have been too quick to think of the global debt crisis and say, ‘I won’t invest in America, I won’t invest in Europe,’” McDonald said.
Instead, institutional investors should consider awarding broader investment mandates that would allow their money managers to be more nimble. As part of their broader investment approach, they could incorporate global companies – those that have insights into emerging global trends and areas of economic opportunity – into their portfolios.
Fortune magazine’s latest Global 500 listing reveals a world map indicating the fastest-growing cities and countries in terms of per-capita income growth. While many investment experts point to the fast-growing outposts in Latin America and the Far East, Fortune’s map also shows attractive income-growth pockets in places as diverse as Salt Lake City, Utah, and Austin, Texas, in the United States and Vancouver, British Columbia, in Canada.
But broad-based economic growth isn’t driven by wages alone – a burgeoning population often translates to younger consumers who will spend, save and invest long term.
“It’s important to follow population growth,” McDonald noted. “For example, Asia is a tale of two markets. You have a very mature Japanese market benefiting from a cyclical rebound. But they have an aging population, which means a long-term demographic challenge.” The region’s other faster-growing areas, led by China and India, are the counterpoint in Asia. Still, some economists wonder if even these economies can maintain the growth they’ve demonstrated in recent years.
Northern Trust’s investment strategists contend that even challenging economic environments offer attractive opportunities.
Consider, for example, the United States. Despite its current economic woes, demographic projections show areas of significant growth among workers under 40, particularly within cities or regions that are experiencing above-average growth. Those states, according to Proximity, an Alexandria, Va.-based research firm, will account for nearly half (46%) of total U.S. population growth between 2000 and 2030.
Northern Trust’s investment strategists contend that even challenging economic environments offer attractive opportunities – particularly within cities or regions experiencing above-average growth.
An institutional portfolio can represent these trends by focusing on the global companies that are best positioned to capitalize on them. Both McDonald and Bowers agree four key sectors should be part of any analysis of long-term investment potential: technology, industrial, energy and construction.
From a broad perspective, for example, growing population centers will need new and expanded infrastructure.
Beyond infrastructure, the open frontier of consumer spending comes with a rising economy and an increasingly affluent young population. According to Deloitte’s retailing consulting division, retailers expect to excel in places with good prospects and good demographics, including Turkey, Egypt, Indonesia, Columbia and South Africa.
“Perhaps of most interest is the fact that global retailers are increasingly talking about Africa. This region, which failed to have significant growth for much of the last half century, is now experiencing good growth as a result of rising commodity prices and better governance,” the report noted. “It will be interesting to see if the world’s leading players take the plunge into this last frontier of modern retailing.”
“As these countries develop and build out infrastructure, people will start to spend,” Bowers added. “Individuals, governments and countries take equal part in the growth story.”
It also helps to invest outside the Western mindset. “Emerging markets don’t grow just because of Western investors,” Bowers said. Particularly attractive environments are those growing without substantial participation – at least at this point – from Western investment. “Economies with no need to borrow have the flexibility and the luxury to have a multi-decade growth plan. Look for continued urbanization, industrialization, plus the creation of schools and universities, because educational access signals a shift from agricultural or blue-collar jobs to white-collar job creation and development.”
Investors also should monitor the growth in personal savings rates, which helps bolster growing economies.
Institutional investors do not need to be consumed by the prevailing sentiment of a worldwide economic malaise, nor should they be constrained by traditional global investment approaches. Instead, with a new focus – one that emphasizes a global perspective rather than geographic mandates – investors can identify and take advantage of global investment opportunities.