Growth vs. Value: IV. International Issues With Both

In the US, I think the main difference between growth and value investors is one of individual temperament,  Obviously, investment objectives are slightly different and managers of each stripe will attract slightly different customers.  But I think the choice for an investor comes down to what types of companies he/she feels most comfortable studying and what level of volatility he/she is willing to experience.  Outside the US, however, the situation is a little different.

The overwhelming majority of growth stock investors work in the US market.  Maybe Americans are more happy-go-lucky than their foreign counterparts.  But, although Americans don’t think much about it, we live in a political and economic environment where growth-oriented companies can enjoy considerable success and are able to raise money in the the financial markets.  That’s not always true abroad.

 *In many foreign areas, capital is not as widely held as in the US but is in the hands of a relatively small number of wealthy individuals and companies.  These entities act as theory tells us they will–as they become wealthier, they become more risk averse.  In extreme cases, especially in less wealthy economies, investors view stocks as a risky kind of bond (as we did in the Thirties-Fifties).  So multiples are low and payment of a large cash dividend is expected.  So only mature companies can list.

*The US is unusual both for the high wealth level (relative to the rest of the world) of the average citizen and for its wide geographical expanse.  Many specialty retail concepts depend on this wealth for their sales and the ability to expand form one region of the country to another for the duration of their growth.  In, say, Japan, not only is consumer behavior different, but also total national penetration is probably a two or three-year phenomenon instead of ten years.

*In many foreign countries, there are very substantial formal and informal barriers to changes to the status quo.  These range from the “Licence Raj” in India to complex laws on locating retail stores throughout Europe and Japan.  Barriers can be informal, as well–from the power of the keiretsu or chaebol in Asia to behind-the-scenes maneuvering to control competition by governments and by groups of institutional investors.

This last point is perhaps the greatest obstacle for value investors working outside the US.  In some value strategies, the thinking is that if the present management and board of directors won’t use the company’s assets effectively, they can and will be replaced.  Of the larger markets, perhaps the worst is Japan, as many US value investors have learned to their sorrow, this is extremely difficult.  Laws make takeover by foreigners difficult and punitively expensive.  Even local value investors find that institutional shareholders refuse to vote for change.  Though not as extreme as in Japan, one can expect many of the same difficulties in continental Europe.

Leave a Reply

%d bloggers like this: