NEW YORK - Globalization will continue to offer opportunities for investors, fund managers and American multinational corporations next year, according to a panel of money managers who offered their outlook for 2006 at a Millennium Media Consulting press briefing last week.
Panelists pushed investors to look beyond traditional large-cap funds comprised of old American blue-chips to international and global funds.
"We have to look at the world economy and how the U.S. fits into it," said Roger Ibbotson, chairman of Chicago-based asset allocation education and consulting firm Ibbotson Associates.
No longer can companies count on American consumers to drive their profits. Debt-saddled as individuals and as a nation, with a trade deficit close to 6% of the gross domestic product (GDP), companies and investors that will yield the strongest returns in the coming year are those looking elsewhere for growth. That means turning to emerging markets such as China and India, recovering economies such as Japan, and the countries rich in resources that help support their growth, such as Brazil or even Russia.
"The world is benefiting from globalization," said Ronald W. Holt, Jr., president and managing director of Hansberger Global Investors. While the S&P 500 index will likely offer investors a 3% return in 2006, international markets will continue to yield double-digit growth, the Fort Lauderdale, Fla.-based fund manager said. Not only do overseas companies have great growth potential, but many are well managed, fulfill real demands and typically cost 30% less than American stocks, he said.
While China and India seem to have captured the attention of most American investors, Brazilian and Mexican markets are up 60%. Even established foreign markets that may yield only 14% return on equity (ROE), compared to the American average of 18%, are worth considering, according to Holt, since they still generally cost 15% less.
Russia is risky, because investors face a lack of disclosure and a volatile domestic situation, but gains can be great, according to Holt. "Russia has been one of the best-performing markets since 1998," Holt said. Year-to-date, it's up 66% from 2004, he added. Russia is rich in natural resources - things like oil and coal, iron ore and nickel - that fast-growing economies and established ones alike depend on daily. China, like the United States, only produces about one-third of the energy it consumes, Ibbotson pointed out.
Japan, reeling from its decade-and-a-half-long recession, offers opportunities, too. Japanese companies have restructured their management, responded to new regulations and beefed-up their balance sheets. Many are ready to invest in new equipment and appear poised for growth, Holt said. Already, the Nikkei exchange is double its rock-bottom 2002 value of 7,600 points.
Offshore investing aside, speakers said they are also interested in American corporations doing some investing in foreign markets of their own.
"At the center of the U.S. economy is the American consumer, making up 70% of the gross domestic product," said Axel Merk, of the Merk Hard Currency Fund in Los Altos, Calif. But the average American carries more consumer debt than ever before and therefore has reason to fear fluctuating interest rates. And that fear translates into Americans becoming not only unwilling, but unable to pay more for products.
Besides expanding their markets, companies must also look abroad to offset increased costs, such as labor, Merk added.
Enter China. With a population of 1.3 billion, Chinese consumers wield considerable global power. And while the country's population is comparatively poor, if even only one-third of the population participates in the global consumer culture, it would mean more consumers added to the world market than by the United States, Holt said.
Right now, China also owns about $100 billion worth of the United States' national debt, Ibbotson said. As significant as that investment is to the U.S., it is an even greater portion of the Chinese GDP, underscoring strong interdependence between the two nations, Ibbotson said.
But not all the speakers were so bullish on international and global plays. Buying funds filled with U.S. stocks - even large-caps - holds some promise in 2006, as long as investors choose wisely, said James McGlynn of Summit Everest Funds. His Cincinnati-based firm focuses on sub-sectors poised to grow. The transportation sector, for example, offers growth despite the effects of $60-a-barrel oil on fuel. While air freighters and trucking companies flail, railroad companies have fared well, McGlynn said.
Although certain durable goods can be produced less expensively outside of the United States, there are arenas in which American companies still dominate the market. The rest of the world still imports movies, entertainment and computer software, for example, McGlynn said.
"Harry Potter and the Goblet of Fire" earned Burbank, Calif.-based Warner Brothers $200 million in the first weekend the film opened domestically, and $300 million abroad. Likewise, while the retail sector lags, media, specifically broadcast companies such as Time Warner and Viacom - both large-cap companies headquartered in New York - benefit, because retailers, clamoring for consumers' attention, inundate the airwaves with ads, according to McGlynn.
When choosing companies within a sub-sector, McGlynn offered, "If the leader is cheap, probably the whole bunch is."
Biotechnology companies produce products with global appeal and offer great potential for growth for 2006, according to Stephan Patten, co-manager of the Quaker Biotech Pharma-Healthcare Fund in Montreal. With a "best-ideas approach," Patten mitigates risk among stocks by choosing companies with late-stage products that have already overcome many of the pricey regulatory and experimental development hurdles.
The biotechnology sector accounts for one-half of all drug patent applications submitted, according to Patten, and tends not to be replaced by generics as quickly as drugs produced by pharmaceutical companies.
Biotechnology companies have such strong potential to perform well in coming years that large pharmaceutical companies have started snapping-up smaller biotechs to bolster their balance sheets. In June, Genezyme, the Cambridge, Mass., maker of drugs that tackle rare genetic disorders, purchased Bone Care International, a company based in Middleton, Wisc., that is best known for developing Vitamin D therapies to treat certain kidney disorders.
Pfizer, meanwhile, paid $1.9 billion - a premium of more than 70%, according to McGlynn - for Vicuron, a biotechnology firm in Pennsylvania with promising anti-fungal treatments in late stages of development.
Patten advises searching for companies working on products that will supplant existing drugs because of the way they are administered to patients, for example a medication that can be inhaled, rather than injected.
The 10-year outlook for biotechnology is promising, said Patten, who projects 12% growth, compared to 8% growth of the Nasdaq index.
Regardless of what segment of the world, or industry sub-sector, that investors look toward, the key is to pick funds that offer not only solid returns, but austere administration, said Theodore R. Aronson, managing principal of Aronson+Johnson+Ortiz. Manager of the Philadelphia-based Quaker Small-Cap Value Fund, Aronson warned investors to pay close attention to how management costs erode the real value of their funds. "If you don't recognize the hidden costs, they will clobber you," Aronson said. Funds can charge as little as less than one percentage point to more than 17.5%, and justify either extreme, Aronson said. "Soft dollars are the biggest disgrace in the industry," he said, predicting their demise within five years.
Most importantly, Aronson added, investors must be realistic. Beating the benchmark by 3% is good, said Aronson, whose own small-cap fund has outpaced the Russell 2000 index by 5.2% in the past nine years. "You better be clear about your expectations, or clients will over-expect," he said.
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