Investing profitably in global megatrends
The benefits of increasing your exposure to international equities have never been more compelling.
With the ageing population in Australia, similar to many other major developed countries, we are now progressively entering what can be described as the ‘silver’ economy. With the significant advances being made in drug and medical technology the average person is living for longer. In terms of investment outcomes the search for yield and income is clearly growing in importance depending on where you are in your lifecycle. What is also very important is the continued growth in capital otherwise one may run the risk of running out of capital in the very late stages of your life. This is where international shares can play a vital role in helping you meet your investment objectives.
It would seem appropriate that Australian shares are currently well represented in SMSFs, particularly if those shares pay fully franked dividends yielding more than the cash rate. Australia has some of the soundest banks in the world and some of the largest and most efficient mining companies. Those two sectors dominate Australia’s sharemarket, with Financials and Materials accounting for nearly 60% of total market capitalisation. However Australia has been one of the main beneficiaries of the commodities super cycle and this has come to an end. As a result Australia is moving through a painful adjustment which may hold back the returns of the local market in the coming years.
Banks are currently operating in a low credit growth environment and, by their very nature, take on risks associated with high financial leverage. The economic picture in Australia continues to deteriorate. Bad debts are low and dividend pay-out ratios are high. Bank net interest margins may well come under pressure should the RBA continue to cut interest rates. Mining companies, by their nature, are subject to wild swings in commodity price cycles.
Whilst diversification is an important reason to consider international equities there are also other compelling reasons for increasing your exposure. There are far more exceptional, world class companies listed overseas than there are in Australia. Many operate in industries that are under-represented on the Australian stock exchange, such as the technology, pharmaceuticals, food & beverage, consumer brands and luxury goods sectors. Many of these global companies are linked to global megatrends which are hard to access through the Australian sharemarket. Some of these powerful secular trends include the advances in new drugs that are required to treat the fast growing ageing population, the rapid rising of the middle class in emerging countries and the internet of things. Many of the international companies that are beneficiaries of these trends have unrivalled track records of consistently compounding earnings and dividends at a rate and consistency that would be virtually impossible for a miner or bank to achieve. Yet most Australian investors choose to ignore these exceptional overseas companies to their peril.
Global pharmaceutical companies are a beneficiary of the ageing population trend. People over 65 years old on average need four times more drugs than younger people and the number of people older than 65 is expected to double by 2060. This is rapidly increasing the need for better and more powerful therapies for chronic diseases. Sales of prescription drugs are expected to compound in excess of 5% per annum with some areas such as cancer drugs expected to grow at closer to 10% per annum. These new novel drugs are generating multi-billion dollar sales for the pharmaceutical companies driving their earnings and dividend growth.
Another important megatrend is the rise of the emerging market consumer. According to forecasts by Mckinsey consumption in emerging markets by 2025 will be worth US$30 trillion dollars, similar in size to consumption in the developed markets, and up from US$12 trillion in 2012. This represents a significant growth rate and represents a trend that is multiple the size of the commodities boom.
A company that will benefit strongly from this trend is Nestle which is based in Switzerland. Nestle's portfolio includes dairy products, ice cream, frozen food, baby food, bottled water, breakfast cereals, coffee and tea, pet foods and snacks. The company owns 29 different brands with annual revenues of more than US$1 billion, among them Nespresso, Kit Kat, Nesquik, Smarties and Maggi. The company operates globally, with operations in 194 countries. In excess of 35% of their current sales are derived from emerging markets where they have had a presence for in excess of 100 years. Nestle has been selling products in China since 1908, in India since 1912 and Brazil since 1921. So the company has built significant infrastructure an extensive distribution network over an extended period of time to sell their products. As consumers incomes in these markets continue to increase I envisage significantly more Kit Kats, Nespresso capsules and Maggi noodles to be sold.
When one thinks of international an often misunderstood fact is that many of them have a long history of consistently increasing their dividends. Nestle has paid a dividend every year since 1959. During those 65 years Nestle has never decreased its dividend payments. Nestle's dividend has been increased in every year since 1995 at an outstanding compound annual growth rate of 12%.
The case for adding international equities to your portfolio are compelling. You get access to some powerful megatrends that are not readily available in the local Australian share market which complements your existing domestic Australian equity portfolio.
This article appeared in mFund News. To stay informed on market and investment updates, subscribe to mFund News.
About the author
Monik Kotecha has 24 years of funds management experience in international and Australian equity markets, including 15 years of managing top-quartile performing portfolios. He has worked in London, New York and Sydney. He spent over seven years as a Senior Portfolio Manager at Investors Mutual Limited, five years with BT Funds Management Limited and three years with the Abu Dhabi Investment Authority.
Monik was a Senior Portfolio Manager of the Australian Share Fund at Investors Mutual Limited and a key member of the Investment Team which was awarded Fund Manager of the Year Australian Equities in 2002 and 2003 by Money Management. Prior to this Monik was the lead portfolio manager for over five years at BT Funds Management Limited on a number of international equity funds and was a member of the asset allocation team. Monik spent the first few years in funds management as a Pan European Equity analyst at the Abu Dhabi Investment Authority in London.
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