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Investment Insights

October 2017

The Long View: The World Is Open for Business

“Companies have to be multinational in their thinking and their approach at all levels … That’s what we look for when talking to companies.”

– Nick Grace

Nicholas Grace
Nicholas J. Grace Portfolio Manager

The face of global business is rapidly changing. In today’s environment, investors are confronted with decisions that require sophisticated analysis, a vision that extends beyond borders and the ability to discriminate between strong and weak companies in a world transformed by globalization.

In our latest Long View, we examine many of the global forces that are transforming the way investors can find opportunities regardless of political borders. Some of the key takeaways from our research include:

• Technology is changing the nature of global commerce. The knowledge economy, or digital trade, is gaining momentum.
• Idea-driven companies are shifting the makeup of global companies over the past decade.
• Globally positioned companies are poised to take advantage of shifting global trade patterns and have the potential to reap new profits and provide new opportunities for investors.

Global Trade Goes From Goods to Gigabytes

The contours of international commerce have undergone a profound transformation over the past few decades. If the 20th century was defined by a phenomenal rise in the transfer of goods and industrial commodities, the 21st century is being characterized by the rapid digitization of services and the increasing automation of manufacturing.

An entire generation of new global companies have emerged over the past two decades and have become giants in the digital economy. Alphabet (Google), Amazon and Priceline are among the most prominent examples. On another front, there is growing belief that the global economy is in the midst of a broad-based recovery, moving in lockstep for the first time since the 2008 financial crisis and providing increased opportunity for multinational companies.
 

World Trade Now Accounts for 25% of Global GDP, Nearly Double Since the 1980s

Source: The World Bank. World trade represents trade of merchandise.

Rise of the Multinationals

Global commerce has been transformed over the past two decades. Global companies in 2015 accounted for 80% of trade, 75% of private sector research and development and 40% of productivity growth. We are likely to see global trade patterns evolve with the increasing digitization of commerce and the likelihood of new trade, tariff and tax structures in many parts of the world. Indeed, global investment opportunities are likely to be vastly different than the world many investors have known.

Shifts in economic and trade regimes and turning points in markets can provide companies with new profit and investors with opportunities. Of course, not all global companies will thrive in this new environment or be winners in the long term. Fundamental research will be key. Nevertheless, successful multinational companies typically have innovative management teams, diverse sources of revenue and the resilience of solid balance sheets. These attributes offer the potential for future success.
 

The Number of FTSE Multinationals Has Grown as the Index Outpaces the Market The Face of Global Business Is Rapidly Changing

Sources: Capital Group and Thomson Reuters. The FTSE Multinationals Index comprises companies which derive more than 30% of their revenue from outside their domestic region. Data are as of 7/31/17. For purposes of comparison, total returns were normalized to 100.

Global Companies Scour the World for Customers

Free trade agreements, the European Union and its common currency, economic reforms and the rise of a middle class in Asia, Latin America and parts of Africa have allowed companies to compete for customers, labor, capital and natural resources on a global basis. Focusing on the country where a company is headquartered is becoming less meaningful and, in fact, may mask risks and opportunities. A more relevant metric is revenue exposure — where companies derive their revenues.

Companies that are benefiting are not just those in local markets like China and India but multinational corporations with global reach, such as Amazon and Anheuser-Busch InBev. A global mindset when it comes to portfolio construction may be more relevant than a country-of-domicile approach to investing.
 

Companies Are Finding — and Competing for — Global Customers Revenue by Region (%)

Sources: Capital Group and company reports. Percentage of revenue for Amazon and Taiwan Semiconductor are for the year ended 2016; for Anheuser-Busch InBev and ASML, it is for the first half of 2017 through 6/30/17.

A New Breed of Multinational Companies Has Emerged

Emerging economies are home to thousands of multinationals
and quickly minting new ones. The growth in the number of large companies in the developing world since 2000 — including a more than 4,000% increase in China — has greatly outpaced the 20% growth of large companies in the U.S. These companies are playing an increasingly important role, and some of them are taking their place among the most powerful companies in the world.

The growth of Chinese business is the most striking feature of the recent Fortune Global 500 lists. China has 115 companies on this year’s list, up from 98 in 2016, with state-owned energy providers State Grid, Sinopec Group and China National Petroleum ranking second, third and fourth, respectively. The largest company worldwide remains Wal-Mart Stores, with revenue of US$485.9 billion. Alibaba Group and Tencent Holdings have been included in the latest edition of the Fortune 500 list of global companies, underscoring the growing prominence of a new breed of Chinese companies on the world stage.

This structural shift in emerging markets has tremendous implications for investors seeking to invest in companies that stand to benefit from rising adoption of mobile phones and internet penetration rates, as well as growing incomes.

Emerging Markets Are Taking Their Place on the Global Stage

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Sources: Capital Group and FactSet. Companies are those with net sales greater than $1 billion USD for each year. Figures for 2017 reflect the latest reported annual net sales available at the time of publication.

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