Why Multinationals Can Survive Trade Conflicts
By Jody Jonsson
Capital Group Equity Portfolio Manager
As a portfolio manager who invests in many large, multinational companies, the most common question I get these days is whether I am worried about the impact of global trade restrictions on these firms. At a time when punishing new tariffs are being threatened and imposed in rapid succession around the world, are these trade-dependent companies the most vulnerable to a brewing trade war?
The answer may surprise you: While I certainly follow these political conflicts, I am not overly concerned about the impact on well-managed multinationals. Simply put, they are the best-positioned companies to navigate an uncertain environment and devise effective solutions. Some of them are starting to do it now, employing nimble, multilocal business strategies that put them closer to consumers and local buying trends. And some of them have been doing it for years, reaping the benefits of a tailored approach to local markets.
Turn down the noise
What’s the rationale for my high level of confidence? There is a reason why multinational companies have come to dominate the global economy and the financial markets. For the most part, these companies are run by smart, tough, experienced managers. They have seen all types of trade environments, both favorable and unfavorable. Therefore, in my view, these battle-tested companies are in the best position to survive and even thrive in a hostile landscape.
For investors, I think it’s very important to avoid focusing too much on the noise surrounding trade and protectionism. It’s easy to get lost in the rhetoric over steel or soybeans or whichever commodity is being targeted next. There are new data points every day, and many of them are inconsequential. To the extent that these trade conflicts cause investors to shy away from multinational companies, paying too much attention to the rhetoric is a detriment to successful, long-term investing.
Rearranging the chess board
If I’ve learned anything during my 29 years as a professional investor, it’s that smart companies will figure it out. Invest in strong, global companies with seasoned management teams and — more often than not — they will find a way to prosper regardless of the environment. I believe the best-run companies in the world will find ways to win even when governments are trying to rearrange the chess board.
For example, the multilocal approach I referenced earlier is gaining traction. As an investor, I search for companies that are establishing successful operations in their local markets, rather than retreating in the face of global trade barriers. More and more, it is becoming crucial for multinational companies to produce where they sell. They must be able to move quickly, stay nimble and respond effectively to local competition.
Just do it, locally
Athletic-shoe and sports-apparel giant Nike optimizes this approach. This summer, Nike unveiled a new data-driven retail store in Los Angeles that stocks shoes according to online buying trends in surrounding ZIP codes. It doesn’t get much more local than that! In Europe, Nike has launched a speedy supply-chain initiative that allows it to tailor colors and new materials based on individual customer preferences in each city where it operates.
Visa and Mastercard are following much the same approach when it comes to electronic payment processing — which must be tailored not just to the preferences of local customers but also to the often strict financial regulations of myriad governments around the world. As a result, both companies are growing at a healthy pace while simultaneously fending off a slew of other fin-tech giants.
A company you may have never heard of, Switzerland-based Temenos, is rapidly growing its highly local business of providing and upgrading enterprise software programs for banks. Many of its customers are woefully behind the times, using old technology, and they require ultralocal solutions to comply with state and federal banking regulations in their home markets. This European company is currently in the midst of an ambitious expansion into the United States.
In many ways, this multilocal approach is crucial for multinational companies based in the U.S., Europe and Japan that are looking to stay relevant or expand into faster growing emerging markets. Many of those countries — China, India, Brazil, etc. — are nurturing their own multinational giants, as well as smaller single-country-focused competitors, and they are not waiting for the traditional global players to catch up.
Aside from all the trade worries, some large multinationals are being leapfrogged by smaller, more nimble competitors who are more in touch with local markets. In my view, that is a bigger threat to multinational companies than any political issues. Emerging markets consumers are looking for brands that they can trust and companies that know the local marketplace. So large multinationals that can break themselves down, think locally, act nimbly and launch products more quickly should be better positioned for success in the long run.
Ultimately, I believe cooler heads will prevail and these global trade disputes will be resolved. But the challenge posed by fierce local competition will continue to be a very effective motivator in the global economy, as it always has been.
Jody Jonsson has 29 years of investment experience, 27 with Capital. She has covered industries such as insurance and household products. She holds an MBA from Stanford Graduate School of Business.