A number of themes are emerging in the global equities space, which makes it an ideal time to invest, says Brenda Reed.
Financial advisers, while acknowledging the case for investing in global equities, often ask: ‘when would be a good time for my clients to invest in this asset class?’
The answer is ‘right now’, because there are always interesting global themes that Australian equity managers can’t exploit.
One prevailing global theme is how businesses in different countries have managed through the global recession.
Throughout most of 2009, many businesses in the US proactively cut costs and adjusted to the difficult environment.
The US firms I hold have reduced their operating costs to the extent that a cyclical rebound is likely to lead to significantly better earnings than expected. Based on the data we are seeing and what we are hearing from companies, this cyclical rebound is on the way.
US industrial conglomerate Ingersoll Rand exemplifies this trend.
The company’s high-quality industrial assets already generate strong cash returns, and I expect the returns to improve as revenues recover.
I also expect a change in management to result in cost-cutting initiatives and a rationalisation of its businesses, factors that have the potential to boost earnings further.
New technology
Embracing technology is another way that businesses have adapted to a lower growth environment.
The desire to enhance productivity is pushing companies towards more long-term investment in new technologies such as cloud computing, which involves the shift of computing power to data centres.
BMC Software and Citrix Systems are two US companies that develop data-centre control and virtualisation software.
Omron, a Japanese company that provides industrial automation systems, is a stock that exploits this trend.
A growing focus on product quality in emerging economies like China is boosting demand for the firm’s products.
On the demand side, under-investment by enterprises in recent years has created pent-up demand for PCs and other office equipment that should benefit the likes of US computer firm Hewlett-Packard and Japanese copier manufacturer Ricoh.
Additional demand should also stem from exciting product cycles, such as smartphones and internet TV.
Communications equipment business Cisco Systems, for instance, stands to gain from long-term network traffic growth that stems from the higher bandwidth requirements of video and mobile data traffic.
As overall demand normalises to pre-credit crisis levels, supply bottlenecks are likely to emerge in the semiconductor equipment arena, which is a relatively concentrated industry.
Holdings such as Californian-based KLA-Tencor stand to capitalise on the lack of alternatives.
Cutting costs
It is not just companies that have to cut costs. Growing deficits are forcing governments to search for new ways to reduce expenditure, and healthcare costs are often one of the targets for belt-tightening.
This is presenting opportunities for companies like Teva Pharmaceutical Industries, which has the ability to produce and distribute quality drugs cheaply.
Headquartered in Israel, Teva is the largest generics producer in the world and has one of the best pipelines and management teams in the industry.
The themes that global equities managers can exploit are not centred on a particular country, sector or industry.
That’s why global equity funds sit so well alongside an Australian equity portfolio.
Brenda Reed is portfolio manager at Fidelity Global Equities Fund.
