Rana Foroohar is one of my favorite Financial Times columnists. The subtitle of her July 21st column about deglobalization is “The wisdom of relying on the equity of US multinationals is now suspect.” Her conclusion is that in the years to come the real economic dynamism in the world is going to come from China and emerging markets. The way for foreigners like us to participate is to own Chinese and other emerging markets equities themselves rather than use US multinationals as proxies.
I think Ms. Foroohar’s conclusion is correct, although I don’t think the reasons she gives are. That’s a surprising departure from her usual incisiveness. For what it’s worth, here’s my take:
–over the past thirty or forty years, economic expansions in the US and Europe were especially robust because they were fueled not only by reviving domestic demand but also by high-beta growth in international trade. That period is now over. The main reason, in my opinion, is that the large, relatively open, stable economies in the Pacific have already been fully penetrated by multinationals, so there’s no extra cyclical oomph to be had. In addition, the developed world has also become more protectionist. And the increasingly overt racism of the administration in the US is making American goods and services things to be avoided rather than aspirationally purchased.
–the 1980s-style argument of US investment managers with no knowledge of foreign markets and no inclination to learn is that US-based multinationals are an adequate substitute. By and large, this has been incorrect, although there have been periods, like the 1990s, when Japan was collapsing and the US was king.
–Ms. Foroohar cites Warren Buffett, a holder of American Express, Proctor and Gamble, Kraft Heinz and Coca-Cola, as an advocate of the approach in the paragraph above–and as a case study of why buying US-based multinationals no longer works. But as I see it, these are all names with sclerotic corporate managements who have been pretending that Millennials and the internet don’t exist. Add IBM, a former big Buffett holding, to that pile. Multinationals like Google, Microsoft, Amazon and Disney haven’t had the same issues. Note, too, that both MSFT and DIS had to toss out backward-looking managements before achieving their recent success.
–I do think that China should be a key element of any long-term-oriented stock portfolio. In addition to the secular growth story, the current Washington strategy of forcing US-based multinationals to move low-end manufacturing out of China will likely end up giving China a substantial economic boost. Similarly, the use of the dollar as a political weapon–the arrest of the Huawei founder’s daughter on money laundering charges, for example–creates a big incentive for China to speed development of its domestic capital markets, making finance easier to obtain for fledging firms there.
However, as with any other foreign market, there is a price to be paid for entry. The rules of the investing game–the investment preferences of locals, the reliability of accounting statements and regulatory filings–are likely different from those in the home market. All this needs to be learned. My approach with China far has been to stick with Hong Kong-listed names, where these risks are lower. Nevertheless, it seems clear to me that there will be greater opportunities for knowledgeable investors on mainland exchanges. Sooner or later we’ll all have to teach ourselves, or find an expert manager to rely on.
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