The US economy is toast and thus prudent investors should stay away from the US stock market. Well, at least that is the belief espoused by a number of bearish market commentators who see the budget deficit, the troubled housing market, and the US's dependence on consumer spending as reasons that economic malaise will be with us for years to come.
And what if they are right? What does that mean for an index such as the S&P 500 going forward?
Maybe not as much as one would think. The reason is that many of the large cap companies in the S&P 500 have diversified revenue bases that serve to diminish the importance of US sales. In fact, according to data available on Standard and Poor's website regarding 250 of the companies within the S&P 500, 46.6% of those firms' sales in 2009 were generated outside of the US. While that percentage was down slightly from 2008, it was still three percentage points higher than it was in 2006.
Does this shift imply that investors can ignore the economic and consumer spending environment in the US? No, but the data does suggest that investors ought to pay serious attention to international markets.
Furthermore, according to the report cited above, sales to Europe represented about 25.6% of the total in 2009, down from 28.8% in 2007. In the meantime Asia's share of the pie has increased to 17.7% of the total, up from 13.2% in 2008 and 16.8% in 2007.
Interestingly, the percentage of sales to South America and Africa have been growing steadily, despite the global economic downturn, while sales to North America outside of the US look to be on the down slope.
Reviewing these trends ultimately leads to the conclusion that the S&P 500 is positioned well to benefit from a major international secular trend that is likely to accelerate in the coming decade.
Specifically, the development that will drive spending growth across the world is improved living standards. Residents of the US live in a modern country with seemingly endless amenities and access to a dizzying array of goods and services. As such, it is often easy to forget that people in developing nations do not necessarily have the same access to the consumption goods that Americans take for granted.
However, as incomes rise and emerging economies become more advanced, the citizens of these countries are going to demand the same standard of living enjoyed by their counterparts in developed nations. Accordingly, they will eat more meat, burn more fuel, buy more luxury goods, and desire the most advanced drugs and new technologies.
The truth is that the populations of countries such as China and India dwarf that of the US. Therefore, even a small increase in the percentage of people who can afford more goods leads to a huge jump in the number of potential customers available to US companies that have substantial overseas operations. For example, according to an October 2010 release from China's Ministry of Security, the total number of automobiles in that country is around 85 million. In contrast, according to the US's Bureau of Transportation Statistics, there were about 137 million passenger cars in the US in 2008. As detailed by US Census data, there were about 304 million people in the US, implying a rate of .45 cars per person. In comparison, using an estimate of 1.3 billion people for China's population results in a rate of .065 cars per person.
As such, even if the population stopped growing but China then achieved a rate of one-third of that of US, there would be 195 million cars in China, a 129% increase over today's level. The impact of such a development on energy usage, the price of fossil fuels and global automobile sales would undoubtedly be dramatic.
Clearly, none of this information should come as a surprise to people who follow the global equity markets. Since the US will likely be stuck in a slow growth environment for a number of years, it is only logical to look for growth elsewhere.
Assuming the investment thesis of gradually increasing exposure to non-US markets is correct, investors have to ask themselves two basic questions. First, what is the best way to gain exposure to international growth? And second, do the valuations of companies that generate revenues from all over the world already reflect the anticipated growth?
For the average investor, the answer to the first question is not to go directly to the source. While betting directly on emerging markets through their local stock exchanges may sound exciting, there are many risks that have to be taken into consideration.
First, the stock markets of such countries are nowhere near as liquid as those of the US. Therefore, there may be large trading costs associated with these markets, prices may be more volatile and investors may not be able to get in or out of positions in thinly traded markets. Additionally, accounting and auditing standards vary dramatically around the world and it is much easier to get away with fraud when the regulators and the court system are not quite as advanced. If those factors are combined with the lack of precise knowledge of local economic conditions, investing directly in companies that reside in less developed markets can be quite risky.
Next, when evaluating companies with attractive revenue and earnings growth prospects, is it absolutely imperative to look closely at valuation. Often times, expectations are either too aggressive or are in line, but the stock price already reflects those expectations. In either of those cases investors can end up paying too much for a company.
What is remarkable is that despite the fact that the secular growth story in the emerging markets is so well known, many world class companies in the S&P 500 trade at earnings multiples that do not reflect these trends.
Take personal and health care company Kimberly-Clark (KMB, Financial) for example. Aside from a slight blip in 2009, KMB has achieved consistent revenue and earnings growth since 2005. More importantly, while overall revenue from 2005 to 2009 only grew about 20%, revenue to Asia and Latin America increased over 52%. KMB is an attractive company because of its exposure to international markets and the fact that its products are associated with a better quality of life. Irrespective of those positive aspects, KMB is currently trading at approximately 14 times trailing earnings with a dividend yield of 4.10%. Thus, KMB is precisely the type of company that should be enticing to investors looking for exposure to growth in developing markets.
The bears may be right and the US economy may stagnate for the foreseeable future. But, considering the striking valuations and international growth prospects of certain US multinationals, concerns about US growth should not cause investors to completely shy away from US-domiciled companies.
Source
And what if they are right? What does that mean for an index such as the S&P 500 going forward?
Maybe not as much as one would think. The reason is that many of the large cap companies in the S&P 500 have diversified revenue bases that serve to diminish the importance of US sales. In fact, according to data available on Standard and Poor's website regarding 250 of the companies within the S&P 500, 46.6% of those firms' sales in 2009 were generated outside of the US. While that percentage was down slightly from 2008, it was still three percentage points higher than it was in 2006.
Does this shift imply that investors can ignore the economic and consumer spending environment in the US? No, but the data does suggest that investors ought to pay serious attention to international markets.
Furthermore, according to the report cited above, sales to Europe represented about 25.6% of the total in 2009, down from 28.8% in 2007. In the meantime Asia's share of the pie has increased to 17.7% of the total, up from 13.2% in 2008 and 16.8% in 2007.
Interestingly, the percentage of sales to South America and Africa have been growing steadily, despite the global economic downturn, while sales to North America outside of the US look to be on the down slope.
Reviewing these trends ultimately leads to the conclusion that the S&P 500 is positioned well to benefit from a major international secular trend that is likely to accelerate in the coming decade.
Specifically, the development that will drive spending growth across the world is improved living standards. Residents of the US live in a modern country with seemingly endless amenities and access to a dizzying array of goods and services. As such, it is often easy to forget that people in developing nations do not necessarily have the same access to the consumption goods that Americans take for granted.
However, as incomes rise and emerging economies become more advanced, the citizens of these countries are going to demand the same standard of living enjoyed by their counterparts in developed nations. Accordingly, they will eat more meat, burn more fuel, buy more luxury goods, and desire the most advanced drugs and new technologies.
The truth is that the populations of countries such as China and India dwarf that of the US. Therefore, even a small increase in the percentage of people who can afford more goods leads to a huge jump in the number of potential customers available to US companies that have substantial overseas operations. For example, according to an October 2010 release from China's Ministry of Security, the total number of automobiles in that country is around 85 million. In contrast, according to the US's Bureau of Transportation Statistics, there were about 137 million passenger cars in the US in 2008. As detailed by US Census data, there were about 304 million people in the US, implying a rate of .45 cars per person. In comparison, using an estimate of 1.3 billion people for China's population results in a rate of .065 cars per person.
As such, even if the population stopped growing but China then achieved a rate of one-third of that of US, there would be 195 million cars in China, a 129% increase over today's level. The impact of such a development on energy usage, the price of fossil fuels and global automobile sales would undoubtedly be dramatic.
Clearly, none of this information should come as a surprise to people who follow the global equity markets. Since the US will likely be stuck in a slow growth environment for a number of years, it is only logical to look for growth elsewhere.
Assuming the investment thesis of gradually increasing exposure to non-US markets is correct, investors have to ask themselves two basic questions. First, what is the best way to gain exposure to international growth? And second, do the valuations of companies that generate revenues from all over the world already reflect the anticipated growth?
For the average investor, the answer to the first question is not to go directly to the source. While betting directly on emerging markets through their local stock exchanges may sound exciting, there are many risks that have to be taken into consideration.
First, the stock markets of such countries are nowhere near as liquid as those of the US. Therefore, there may be large trading costs associated with these markets, prices may be more volatile and investors may not be able to get in or out of positions in thinly traded markets. Additionally, accounting and auditing standards vary dramatically around the world and it is much easier to get away with fraud when the regulators and the court system are not quite as advanced. If those factors are combined with the lack of precise knowledge of local economic conditions, investing directly in companies that reside in less developed markets can be quite risky.
Next, when evaluating companies with attractive revenue and earnings growth prospects, is it absolutely imperative to look closely at valuation. Often times, expectations are either too aggressive or are in line, but the stock price already reflects those expectations. In either of those cases investors can end up paying too much for a company.
What is remarkable is that despite the fact that the secular growth story in the emerging markets is so well known, many world class companies in the S&P 500 trade at earnings multiples that do not reflect these trends.
Take personal and health care company Kimberly-Clark (KMB, Financial) for example. Aside from a slight blip in 2009, KMB has achieved consistent revenue and earnings growth since 2005. More importantly, while overall revenue from 2005 to 2009 only grew about 20%, revenue to Asia and Latin America increased over 52%. KMB is an attractive company because of its exposure to international markets and the fact that its products are associated with a better quality of life. Irrespective of those positive aspects, KMB is currently trading at approximately 14 times trailing earnings with a dividend yield of 4.10%. Thus, KMB is precisely the type of company that should be enticing to investors looking for exposure to growth in developing markets.
The bears may be right and the US economy may stagnate for the foreseeable future. But, considering the striking valuations and international growth prospects of certain US multinationals, concerns about US growth should not cause investors to completely shy away from US-domiciled companies.
Source
