Global equities: Managers grapple with growth slowdown and terrorism fears

Matt Moody, vice-president, investment management and a member of the Mackenzie Ivy team at Mackenzie Investments. The team’s wide range of mandates includes Mackenzie Ivy Foreign Equity and Mackenzie Ivy European Class. The Mackenzie Ivy team seeks to buy high-quality businesses and not overpay for them.

Peter Moeschter, executive vice-president and portfolio manager at Templeton Global Equity Group, Franklin Templeton Investments. A value manager, Moeschter runs both EAFE (Europe, Australasia and Far East) and global portfolios for retail and institutional clients.

Michael Hatcher, head of global equities and director of research at Trimark Investments, a division of Toronto-based Invesco Canada Ltd. A value manager, Hatcher’s extensive responsibilities include Trimark Europlus and Trimark Global Fundamental Equity.

Q: Let’s start our discussion with the global economy. The International Monetary Fund’s forecast for global growth for 2015 is 3.1%, down from 3.4% in 2014. The IMF is forecasting growth of 3.6% in 2016. This is hardly robust growth, and growth around the world is uneven. There is a divergence in monetary policy in the major economies around the globe.

Moody: Our view has been for some time now that after the global financial crisis, it was reasonable to assume slower global growth in developed economies. That’s what we’ve seen. Some years are slightly better than others. There hasn’t been a return to pre-crisis economic growth rates. There’s no reason to return to that, at least, in the near term. On monetary policy, the bottom line is that all major central banks have programs that are geared to stimulating economic growth. The U.S. Federal Reserve Board is expected to raise its policy rate, but this will be from nothing to next-to-nothing. It has taken the Fed this long to undertake to do this. There are a large number of European countries that have issued bonds at negative rates of interest. The environment is still fraught with risk.

Hatcher: The economies are stumbling along and gradually getting better. I do think that there is some divergence in monetary policy between the United States and the other major economies. Today, you’re seeing even more economic stimulus coming out of Europe. This is likely to continue to put pressure on the euro and speaks to a strengthening of the U.S. dollar.

Moeschter: Interest rates have been low for so long. We use a five-year model of companies for stock selection and we’re normalizing interest rates at higher levels, as part of this exercise.

Q: Will the terrorist attack in France on Nov. 13 have any influence on European monetary policy?

Moeschter: It’s likely to encourage the European Central Bank to continue with its stimulus of the eurozone economies.

Moody: A major holding in a number of funds which the Mackenzie Ivy team manages is the global food company Danone SA, based in France. Danone is multinational and not too reliant on France, or on any one country. We prefer companies that are global in nature. In the case of Danone, France is its most important market, but it’s about 10% of its sales. More than half its business is in emerging markets.

Q: We will discuss the importance of emerging markets to these global companies next. Let’s finish our analysis of the impact of the terrorist attacks, particularly the one in Paris, on financial markets.

Moeschter: There is a near-term impact. People change their travel patterns. But these changes tend to be transitory. There are near-term impacts on the airlines, but the major listed airlines are global in nature. There are also impacts on the hospitality industry. But here too, the large, listed companies like AccorHotels, which is based in France, tend to be global.

Q: Accor’s stock price did weaken after the Paris attacks.

Hatcher: We don’t want to downplay the human toll. To some observers, these attacks are becoming the new normal. But this is not new. There are always going to be tragedies around the world. When you’re a long-term investor looking for good businesses, you’re apt to be in businesses that could be hit by a short-term event. But if you’re investing in businesses with the right moat, you’re going to be fine on a three-to-five-year basis. Again, not to put an analytical slant on a human tragedy, an event like in Paris could open up opportunities to buy stocks that you consider have long-term potential. We did not buy anything after the recent Paris attacks, but an example where we did was after the tsunami in Japan.

Q: The outlook for emerging markets and China? Michael, you own companies based in both China and Brazil in Trimark Global Fundamental Equity.

Moody: We don’t have direct exposure to China. We have indirect exposure through companies like Danone, which has a pretty sizeable business in China, as do a lot of other multinational companies. China’s economy is so big. If there is a hard landing, which for us is not a slowdown to a 4% to 5% per annum in GDP growth, but far worse than that, all bets are off. It will be hard to predict what the impact of this will be on individual companies.

Q: The IMF forecast for China’s growth is 6.8% for 2015 and 6.3% for 2016. China’s growth rate in 2014 was 7.3%. Peter, what about your global portfolios’ exposure to emerging markets?

Moeschter: The portfolios focus on developed markets. The mandates allow for modest direct exposure to emerging markets. We have holdings in China and South Korea, which is technically still an emerging market. These two countries would account for the bulk of the emerging-market exposure in the portfolios.

Moody: We have a holding in a Korean company, Hyundai Motor Co.

Moeschter: One of our holdings in China is Sinopharm Group Co. Ltd., a major pharmaceutical distribution company. A lot of the government’s emphasis in China is on health care. Sinopharm can still do quite well, regardless of China’s economic growth.

Hatcher: We also own both Sinopharm and its parent Fosun International Ltd.

Q: What percentage of the revenue of the companies in your portfolios comes from emerging markets?

Moody: The exposure is pretty steady and in the mid-teens. Not all of the companies disclose this, so we have to estimate this in some cases. We take a long-term view and this exposure to emerging markets has been beneficial for many years, leading up to this year. Now it is often seen as a headwind. If you take a long-term view, the companies would want to have strong, competitive positions in these markets.

Hatcher: Looking at our holdings, companies like Diageo PLC, Nestlé S.A. and British American Tobacco PLC have a significant percentage of their revenue in emerging markets.

Moeschter: Quite often the growth rate of these companies is being driven by their exposure to emerging markets. So the slowdown in emerging economies has an impact, which is more material than some might think.

Hatcher: It’s not uncommon to see 2% to 4% growth in the companies’ business in the developed markets and 7% to 9% in their emerging-market business. Depending on the mix, it results in a 5% to 6% overall growth rate.

Moody: Emerging-market exposure is now much less of a tailwind, if not a headwind. That could have implications for mid-to-long-term growth rates of multinational companies. The growth rates might not be as strong as in the decade leading up to this.

Hatcher: The fund that we’re discussing, Trimark Global Fundamental Equity, has the highest direct emerging-market exposure of our global mandates at 25%. We have an integrated global team. We have 60 names in Global Fundamental Equity and we are looking for the best businesses around the world at attractive valuations. The largest weight in the fund is Fosun. In the early 90s, Fosun’s founders started buying assets that would benefit from the infrastructure growth in China. In the mid-2000s, Fosun started to move into areas such as insurance and asset management and transformed the business. They are very astute investors.

Q: Finally, is China’s slowdown a significant cause for concern for global investors?

Moody: Any time that you have an economy that’s so big and has accounted for such a high proportion of the demand for various commodities and other products over the years, it’s going to have a huge direct and indirect impact on other emerging markets and on some developed markets, as well. This is why it’s a little worrying. There are some flags. The amount of debt accumulation in the economy, for example, is of concern.

Hatcher: Longer-term, China is trying to transition away from an infrastructure-based economy to a consumer-based economy. That is a long, long-term trend and there are going to be significant cycles along the way. Longer-term, we are comfortable with this transformation, but shorter-term, to Matt’s point, there are some flags. If China does hit a significant bump, it will impact not only Chinese stocks.

Editor’s note: This is part one of a three-part global equity roundtable.