Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Tom Walker, manager, Martin Currie Portfolio Trust.
In Britain, the very modest growth achieved in 2010 came despite a dip in the fourth quarter. High household debt, an overpriced housing market, unfettered inflation and the government’s onslaught on the deficit will pose further challenges in 2011. In America, economic growth has beaten expectations, but remains muted compared with previous recoveries. And in Europe the ongoing problems of the peripheral economies continue to overshadow the booming revival in German exports. The economic picture is brighter in developing countries, where growth has been robust. Here, though, the main danger is inflation, with food prices reaching alarming levels in countries such as India and China. Food inflation is a key cause of social unrest in emerging economies – and social unrest can lead to regime change, as we’ve seen in recent weeks.
So, although the global economy is undoubtedly improving, there are challenges aplenty ahead. But the key to negotiating these is simple: focus on companies, not countries. While macroeconomic uncertainty has persisted, recent corporate news has been very good. Many firms have succeeded in cutting costs to such an extent that modest revenue growth and improved profit margins have led to robust earnings.
Looking at these company-specific improvements helps investors cut through the uncertainty. My strong preference is for firms that are exposed to the global economy rather than to any individual country or region. I also follow another simple mantra: own the world’s best companies. These don’t depend on financial leverage and booming economies, but can prosper even when consumers feel the pinch. They offer real potential for growth through innovative products and management. And their share prices don’t yet reflect that potential.
McDonald’s (NYSE: MCD) is a good example. What sets this fast-food giant apart from its competitors are resilience and innovation. It’s consistently been able to navigate changing consumer appetites – and has been equally consistent in expanding its market share and growing its sales. That consistency makes it a steady performer and a great way to stiffen the spine of a portfolio. And if austerity does indeed bite in 2011, consumers will be more likely than ever to sink their teeth into McDonald’s affordable offerings.
Even where a sector faces particular challenges, as with the banks, company-specific factors can override those difficulties. Barclays (LSE: BARC) is a case in point. Under its ambitious new CEO, this global bank is streamlining its operations and setting eye-catching targets. It boasts a more stable capital position than most of its competitors and is set to dispose of its non-core assets – a move likely to be rewarded by the markets. Striking profits for 2010 add to our conviction here.
Finally, it’s facile to say that debt is always a bad thing. Many companies are under-borrowed and sitting on stodgy cash piles. When a company has strong cash flow and growth, borrowing can be very helpful. Take Seadrill (OSE: SDRL). This Norwegian firm operates drilling rigs worldwide. With its modern fleet, it’s well placed to benefit from tighter regulation in offshore drilling following last year’s Macondo disaster. The stock offers a high yield and stands to benefit from acquiring some of its peers.