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Grey rhinos, fierce competition confront foreign markets

Glenn Freeman  |  28 Aug 2017Text size  Decrease  Increase  |  

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Internationally-focused investors must understand companies are in fierce competition that will see clear winners and losers; the three Cs in India; and a moment of truth for China.

 

Searching out what he describes as "future quality" businesses is a challenging proposition in the current global landscape, says Will Low, head of global equities, Nikko AM Edinburgh. These are companies with a "strong cash-flow outlook, good balance sheets, and a valuation that supports these factors".

"We are constantly reviewing the market trying to find these new and exciting companies ... at the moment, we feel that markets are relatively expensive, we're in a world where quantitative easing has manipulated up asset prices across the whole spectrum," Low says.

"Growth has gotten better, but it's still relatively pedestrian versus history, and we see nothing in particular to see why there's going to be anything significant regarding the acceleration of economic growth."

In the current backdrop of valuations and excess returns, he expects to see "winners and losers, as these great disruptive trades take place". Low believes that with more marginal revenue, businesses have to fight harder for competitive advantage: "Disruptive innovation is good in some ways, and bad in others," he says.

He draws comparisons between now and the tech boom of the late 1990s, when cheap capital was also plentiful.

"As much as there will be many winners in this new and changing world, undoubtedly there will be some businesses that aren't winners ... it will be very much a 'wheat and chaff' situation in terms of some of that cleansing that's going to take place," Low says.

Healthcare is one sector he highlights, seeing strong opportunities in US-based companies LabCorp and ICON plc, both clinical research organisations involved in the outsourcing of drug development.

While Nikko AM is increasing its weighting to these types of healthcare companies, it is underweight biotech and pharmaceutical companies.

Among Australian-listed healthcare companies, he likes ResMed (ASX: RMD), which is was first listed in the United States, where the bulk of its business is done.

"It's about sorting out who the winners and losers are ... you want to make sure they have durable growth, the right balance sheet and sensible valuations," Lowe says.

India's moment of truth

On the other side of the world, the opportunities in Asia are shifting, as markets increasingly question what China--the biggest disruptor in decades--is going to do from here to continue growing.

Highlighting the importance with which he views key Asian markets, "how can you understand the world if you don't understand what's happening in China and India?" says Robert Mann, senior portfolio manager, Asian equities, Nikko AM Singapore.

"China is one of the biggest disruptors. The question is, what does China do from here and is there anyone else out there like China?"

Looking at India, he views it as similar in some ways but also quite different in others: "India's got the population, in many ways it looks like China did in the year 2000," Mann says.

He views India's demographics as favourable, along with its reformist government under Prime Minister Narendra Modhi.

"So much of the growth in the global workforce is in India ... the question is, can you create jobs for all these people, or can't you? It's pretty binary," Mann says.

However, he believes the way it grows will be quite different to China, with the same model employed in China not something that can be transplanted into India.

India and China: three Cs and grey rhinos

"But they can do lots of little things to improve efficiencies. It's about getting rid of corruption ... it's huge numbers of small things that are hard to do, but you need a really strong government, which they currently have," says Mann.

He believes Modhi will win the next federal election. "He is, in my view, not corrupt, and he's an unbelievable marketer."

"Does that mean that for 20 years, India can grow like China has? I don't know, but I think with the population dynamics, they could have five or six years of really strong growth."

In China, he sees some considerable challenges going forward, referring to the rise of shadow banking and the concept of "grey rhinos".

Contrasting with the popular investment analogy of a "black swan" event, he says a "grey rhino" is "big--you don't notice it at first; it looks slow, but when it's charging you, it's quick and it's dangerous". The term  refers to the known but overlooked threat of rising debt in China's banks and financial firms via its shadow banking system.

However, Mann notes the consumption story in China is still very strong, and believes a key part of choosing the success stories here is about understanding how Chinese investors think as they start moving into external markets.

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Glenn Freeman is a senior editor at Morningstar.

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