Under-exposure to global stocks may be missing out: Insync Funds Management

Australian investors including SMSF’s who remain significantly under-exposed to global stocks may be missing out on better value and growth stories not easily available on the ASX.

The big-four banks plus BHP, RIO, News Corp, Telstra, Wesfarmers and Woolworths account for around $900 billion (or a whopping 60%) of the total market.

Diversifying a portfolio beyond Australia can offer a broader range of class-leading businesses.Notably absent from the local stock market is leading global technology stocks, leading global healthcare stocks, global consumer brands or Asian exposed high growth industrial stocks just to name a few.

As we see the transition of Australia from further declines in manufacturing and a greater reliance on commodities the outlook for the local economy gets somewhat more difficult to forecast. We have seen commodity prices adjust as the mining boom slows to more normal levels and the level of supply increases partly due to some of the large mining projects coming on line.

The $A has remained fairly strong even given this as interest rate differentials in Australia has still been attracting overseas investment to chase our yield compared to the very low rates in the northern hemisphere.

With the relatively strong $A still trading above long term averages, this offers local investors the opportunity of gaining exposure to some truly exceptional global companies. If these economic trends continue this window of opportunity could close.

A question that investors should be asking themselves is where growth will come from going forward if the mining sector is not the driver.

Individual companies that are the beneficiaries of innovation or are on the right side of structural change will grow faster than GDP. Other opportunities globally will include powerful forces such as the ageing demographics and the healthcare spend and also the rising consumption of the developing world. This is where the work is done to identify these opportunities in a still relatively low growth environment.

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International equity fund manager, Insync Funds Management, believes that now is the time to buy global stocks.

“Over the last ten years large cap global shares have gone from being wildly overpriced to reasonable value. This is seen by the S&P 500 moving from a PE (Price to Earnings ratio) of 35 times to a current PE of 14 times.

“As a result, the S&P has delivered a meager return of 1.3% p.a. Combined with this has been the re-rating of the Australian dollar which has doubled from around $US0.50 to its current parity level with the USD,” said Bob Desmond, Senior Portfolio Manager, Insync Funds Management.

This has brought a dramatic increase in the buying power of Australian investors who invest abroad. Consider the following example of an investor who bought Microsoft ten years ago:

“This shows for each dollar invested in the company, an Australian investor is getting 10 times more ‘bang for his buck.’ Investors as a group are always backward looking and always want to buy ‘what has gone up’,” said Mr Desmond.

In 2000, investors were selling resources and emerging markets to buy technology and US large cap stocks. Ten years later, they are doing the exact opposite.

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International equity fund manager, Insync Funds Management, considers the key global investor themes of 2011-2012:

• China – we believe inflation in China will emerge as a much bigger theme than the markets are anticipating in the coming months

After the GFC China really opened the floodgates of monetary and fiscal policy, money supply has increased over 50% in the last two years and the Government has embarked on a public works program that is the biggest since WW2 – to put this into context there are currently 7000 skyscrapers under construction in China compared to only three in the US!

Fixed investment is running at over 50% of GDP and this is clearly unsustainable. (the US peaked at 18% in their recent construction boom). Our sources tell us that inflation could be double the reported figure of 5% and this will require China to slow growth dramatically to bring this under control.  This will have an obvious impact on the Australian economy and we expect the Australian currency to weaken over time.

• Higher inflation is not only limited to China; much of the emerging world has inflation rates that are higher than the authorities would like

In fact, this is one of the primary causes of the unrest that is sweeping the Middle East. This will require a tightening of policy in those countries as well as slower growth.

• In Europe we do not believe the peripheral debt issues have been resolved but have only been deferred

This is confirmed by the credit markets where spreads are still at very high levels. At some point Governments will have to face reality and look at some form of restructuring – which will most likely involve some pain to bondholders.

• Finally, we believe the US economy may surprise to the upside this year

Corporations (especially large multinationals) are sitting on record levels of cash and this combined with accelerated depreciation in the US will lead to a decent recovery in corporate investment. In addition, the US is still home to the best companies in the world, many of which have large global operations (50% of the S&P earnings are ex US).

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• Their overweight home loan portfolios
• Their regional outlook
• Their recent dividend performance

Sydney-based international equities manager, Insync FM, does not hold any banks in its 25-stock portfolio of the Insync Global Dividend Growth Fund. Why is that?

For Insync FM, banking stocks simply do not make the grade for investment at this stage. The key reasons are:

• Banks have too much leverage  – Insync FM can get the same return from a stock like Nestle with no leverage without buying a bank that is running at 10 – 20 times leverage
• Banking is a commodity business – it is hard to differentiate their products from each other. Thus, where is the pricing power? How will it add to their share price or dividends?
• Consumers are deleveraging and therefore banking profits won’t be benefiting from a quick uptick in consumer borrowing
• More Government regulation for banks means higher capital and liquidity requirements which will eat into profits. Have we seen the full effects yet of Basel III on bank profitability? We think not.
• Banks can face liquidity troubles well before insolvency issues become a concern for an economy, e.g. Ireland and Iceland. Therefore investors need an above average return to compensate for the added risk.

“Many banks are well run but there are better international companies for a global portfolio at this time. You could not look at any developed market banks, particularly Australian banks, and comfortably add them to a high-conviction global portfolio given their risk profiles and their recent cuts to dividends. Anyway, it would be difficult to rate any Australian banks as truly global given their overweight home loan portfolios and their regional outlook,” said Mr Monik Kotecha, CIO of Insync FM.

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Investors like the Nestlé Story – reaching consumers in the emerging markets and developed economies are targeting over 40% of their sales coming from the emerging and developing economies.

Which is the best, most cost-efficient way to buy into Nestlé?

“Buying into emerging and developing countries is different from gaining access to their consumer through an international stock. A safer route to the spending power of the emerging market (middle class) consumer is through proven international brands that are in place already in these countries. Also worth noting is that, in the case of Nestlé, its consumer  brands appeal to aspiring customers to supposedly superior international brands over their local rivals,” said Monik Kotecha, CIO, Insync Funds Management

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