I’m Matt Reynolds and this is Capital Ideas, your connection with the minds and insights helping to shape the world of investments
Today I’m going to talk about a part of a market that has consistently provided solid opportunities for investors to seek strong long-term returns and is a little bit different from growth vs value, large cap vs small cap and sector rotation calls.
It’s a focus on multinational companies and - more specifically – identifying multi-nationals that are and can be the global champions of today and tomorrow.
In this podcast I’ll be exploring the types of characteristics of multinational companies that could mean they are well positioned for resilience during this period of volatility
I’ll also share some ideas on global champions that could prove to be robust enough to grow in value throughout economic and market cycle.
But to start - what do I mean by the term global champion?
Well, they are the types of companies that can do well in almost any environment.
They can weather the tough times but they can then position themselves to succeed.
I think one of the things we saw during Covid was how important it was to be the type of company that had many options.
If you were dependent on a sole supplier in China for example, during Covid yoy had a very difficult time as a company.
And where I think multi-nationals are able to capitalize on those kinds of dislocations is that they've got used to these sorts of disruptions just by virtue of having been global and operating in a global footprint.
I think the post covid world is seeing an acceleration of changes in global trade patterns and - while we may not be quite as global given the geopolitical situation - the companies that are poised to thrive are likely those that can move quickly depending on the circumstances.
And so, when we get questions around whether the long running trend of globalization is turning into de-globalization now, I would say I prefer to call it multi-localization.
Multi-nationals can localize their supply chains, they can produce closer to where they sell. They have multiple sources of supply and they're not just dependent on one particular region, for example.
And so, I think those companies are still the best position to benefit, even if we have a retreat from peak levels of globalization
And those companies also tend to be in industries where you have more of a winner take all or winner take most kind of dynamic. In many industries around the world, we've seen consolidation down to a handful of really globally competitive companies.
It's been my experience that companies that operate in only one country may be disadvantaged in a world that has become more tricky geopolitically. So having more options about where you produce, where you sell, and so forth is really going to play to the strengths of these global champions.
And some examples would be companies like Taiwan Semi and ASML in the semiconductor area.
These are just outstanding companies that really don't have any equal on a global basis.
Some of the European luxury goods companies like LVMH and Hermès - these companies have localized themselves all around the world. They have incredible flexibility to move production and, and really because of their dominance, they have a lot of options that are not open to others.
The less well-placed companies would be those that have less options and a recent example were those that were very energy-dependent on Russia. We saw that with a lot of companies in Europe that have basically one single source of energy.
As a result of these recent dislocations, companies may also develop a less of a singular focus on lowest manufacturing and hyper-operating efficiency some of which may have been built on brittle supply chains.
So, I do look for companies that have this kind of flexible footprint,
the ability to zig when everything else zags and that are in industries that sort of naturally lend themselves so the dominance that they can have.
Another more recent example may be what is happening in AI.
I think some global champions are the type that incorporate the disruption that could come from widespread use of AI.
An example might be how AI is galvanizing Microsoft and Alphabet - AI could be very disruptive to these companies because it's all over the place – there are lots of startups, lots of new end-uses and these companies are also, in a sense, trying to disrupt themselves as much as possible. I think that’s another hallmark of a global champion, that they don't get complacent, but they try to incorporate disruption to their business.
In a post covid world I also think many investors are looking for their companies to have resilience in their operations and financing,
Let’s unpack this a little further by looking at financials, management and customers
I’ll start by looking at some of the more financialcharacteristics of companies that one might describe as global champions
Resilience in the financials from revenues coming from diverse locations (including emerging markets), and they may be the # 1 or # 2 in their industry, and often benefitting from strong competitive moats. Customers obviously drive revenues and for many businesses a broader customer set is better. There is likely more resilience to revenues if your customers come from different industries and geographies.
Businesses with customers that are highly homogenous – for example, say, they are all backed by the same sector or consumer trait - well, watch out if that attribute stumbles
And access to multiple sources of funding I think is attractive to investors. Companies that have operations outside of their home markets typically engage with more stakeholders in the global financial system – relationships with foreign banks, multiple commercial paper programs, secondary foreign listings and so forth. This creates diversity in funding sources and may add resilience when financing is needed.
And thinking though the management aspect….From a management perspective, multi-national company management teams have had to step out of the relative safety of their home market and successful expand their businesses under different laws, regulatory regimes, customs and customer preferences.
Whilst some of these management teams make mistakes, they often learn from these, re-engage at a local level and then thrive. These management teams are often a bit more battle tested and hardened. Multinational management teams have had to embrace change – like we are seeng now – and prosper.
As an investor in a time of some quite substantial geopolitical and trade change I’d like to be invested in management teams that have had some experience of this before.
Finally thinking about regulators or single country oversight – in my view exposure to multiple jurisdictions can in some instances help lower business risk.
A business that depends on a single country’s regulatory regime is beholden to that pen.
A company with multi-local characteristics may show resilience if one of the regulatory regimes moves adversely – well, there are other sources of revenue. For large companies, experience in cooperating in multi-regulatory environments may also better equip management to anticipate changes and fortify business practices ahead of domestic only or non-multinational companies.
How do Capital Group select the global champions to back as the world economy – and trade – continue to be challenged?
Well, in short, there’s probably no surprise when I say it comes down to
- in-depth company research,
- the long-tenured investment experience to know what to look for, and
- boots-on-the ground local coverage across many regions
Fortunately, all of these aspects of identifying long term successful multi-national companies can be seen in the Capital System.
So in conclusion, 3 key points from todays podcast
- Multinationals have outpaced the market over the long term [see appendix]
- in an environment of change, focusing on global champions may support investment results
- long term investment success requires allot of research and experience to identify companies with the attributes of potential future global champions
We’re always trying to get better. So, if you have any feedback — including topics you’d like to see addressed in future episodes — send us an email at CapitalIdeasPodcastAustralia@capitalgroup.com.
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