Recent headlines out of Europe are some of the scariest since the financial panic four years ago, but that shouldn't deter Canadians from investing in global equities, says Sukyong Yang, a portfolio manager at Cumberland Private Wealth Management.
She says investors can make money during gloomy times by focusing on conservatively managed, international blue chip companies that have dominant positions in their products or services. She's found that even companies in hard hit Europe with these attributes are prospering, despite the general air of doom and gloom around the continent.
A clear sign that going abroad makes sense is the performance of domestic and international stocks so far this year. Canadian investors may feel good about having some of the world's strongest banks and living in a country with a relatively strong fiscal position, but these advantages haven't translated into stock market gains.
Canadian stocks are actually down for the five-month period ending May 31, with a 2.6 per cent decline in the S&P/TSX index. Ms. Yang's global portfolio has risen 3.2 per cent, before fees. The MSCI World Index, a broad measure of international equities, is also up – by 2.8 per cent – in Canadian dollar terms, another indication that frightening headlines aside, investors who have shifted some funds abroad are making more than those who've chosen to stay at home.
Ms. Yang says Canada's stock market has a glaring structural weakness, with 77 per cent of the TSX index concentrated in just three sectors – banks, energy and materials. When one or two of these sectors are weak, Canadian stocks will likely underperform. Meanwhile, international markets offer a much wider breadth and depth of companies in fields such as health care and consumer products that are poorly represented in Canada.
Buyers of global equities have "just a multitude" of choices compared with Canadian stocks, she says. Among her approaches, she tries to find companies that are so compelling she's comfortable holding them for years.
One such company is German-based Adidas, a leader in athletic sportswear. Ms. Yang says the company has been outshone by competitor Nike, but is regaining its footing. Adidas has sizable exposure to emerging markets and a strong balance sheet. Investors haven't given the company credit for its Reebok acquisition, even though the brand is poised to gain market share, in her opinion.
She also likes IBM, which is benefiting from its steady inflow of revenue from service contracts and should be able to maintain double digit earnings growth. IBM is often seen as a computer maker, but Ms. Yang says only 8 per cent of revenue comes from hardware sales, indicating the success of its transformation into a company reliant on stable service revenue.
Another U.S.-based company getting the nod is Honeywell International, best known to consumers for its thermostats. It has good cash flow growth, and an attractive valuation. Ms. Yang says the company is a play on the burgeoning field of energy efficiency.
In Asia, Ms. Yang likes South Korean auto maker Hyundai Motors, one of the best bets in the global car business. An investment in the company over the past five years would have been a far smarter place to put money than in Canadian stocks. Hyundai has returned about 250 per cent more since early 2007 through capital gains and dividends than the total return from the S&P/TSX composite.
Essilor, the French based lens maker, has also caught her eye. The company has a commanding global market share of about 40 per cent. While eyeglass lenses are common in developed nations, emerging markets offer the potential of rapid growth, although there is the risk the company could experience pricing pressure from low-cost lens makers in Asia.
Another approach to the health care sector is through Fresenius SE, a German operator of private hospitals and a global leader in dialysis products. Both sectors are medical niches that should prosper, first because of the greying of the population in Germany, and then because of the global increase in the incidence of chronic diseases, such as diabetes, that lead to the need for dialysis.
Another pick, Hutchison Telecommunications HK, is more attractive than BCE, a similar Canadian based company. Over the past three years, it has outperformed the S&P/TSX by about 225 per cent. The company has a yield of more than 5 per cent yield, a strong balance sheet, and a leading position as the largest mobile operator in Hong Kong.