Looking beyond UK borders offers opportunities and risks

Saturday 22 September 2012

Most private investors focus on British companies, listed in London.

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FUNDAMENTALS Colin McLean

This is not just a matter of confidence in the pound or the British economy – they know that most major and medium-sized UK businesses have good global exposure.

But is it as good as having direct investment in shares overseas? This year has seen major markets diverge, with dramatic outperformance by the US market contrasting with weakness in Chinese shares. How can investors target opportunities when stockmarkets and economies are out of step?

The flight to safety – with investors focusing on what are seen as defensive or quality shares – has driven extreme valuation differences. The US economy is the first to recover, with encouraging news in construction, housing and retail. Its further monetary stimulation should accelerate this, and US banks have recapitalised, with good progress in sorting out impaired loans. But the strength in Wall Street already anticipates some of this. Average valuations on US shares are at historic highs and also expensive relative to similar European businesses. While Europe is facing an economic squeeze caused by a cutback in bank lending, it does have some major global businesses. If Europe can provide further stimulation for its economies, then ratings of these European businesses should catch up with their US peers. The likely pick-up in global growth as economic stimulation extends to Europe, with an expected boost also in China, could be in European listed global businesses. These may not be defensive businesses with low economic sensitivity, but industrials and other cyclical businesses that will get a boost from increased growth. Indeed, some of these share prices are already behaving much more like US listed businesses. British investors can effectively buy Wall Street at a discount.Businesses serving the US construction sector, such as Ashtead and Wolseley, are reporting firmer pricing and better demand. Their share prices, though London listed, are moving much in line with the US market. Credit specialist Experian is another British company with a strong US strategic position and significant US dollar earnings that has moved up this year as if it was US listed. And there are other UK groups with significant US dollar earnings with the same characteristics. Although pharmaceuticals such as GlaxoSmithKline are an exception to this, investors still have plenty of choice in looking for attractive ways in the London market to gain exposure to US recovery.Some of the big sectors in European markets, such as luxury goods and car manufacturers, are not well represented in London. But for investors wishing to stock-pick for global exposure to these areas, they can find a few businesses of global scale headquartered in the UK. For example, Inchcape is a car distributor with operations around the world, and its shares have moved closely with global markets, matching the major European auto manufacturers, such as BMW. The London market offers good global access. But investors should be selective, as some of this exposure is to miners and other resource businesses that may have much greater commodity price and governance risks. China's economic rebalancing towards more emphasis on domestic consumption may give a weaker background for metals. Instead, investors should look at the London-listed large and medium-size groups that offer targeted exposure to sectors recovering globally. Many of these winners have good strategic positions, and should progress if there is further monetary stimulation.Colin McLean is managing director of SVM Asset Management

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Looking beyond UK borders offers opportunities and risks

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