Consumers and companies in the United States may have tightened their purse strings, but business has been booming in many parts of the world where populations (and middle classes) are growing by leaps and bounds. In 2012, emerging-market economies are expected to grow more than twice as fast as developed-market economies, according to the International Monetary Fund. And there's no end in sight.
While there are plenty of ways to give your portfolio international exposure, one fairly conservative approach is to invest in "global gorillas," large companies based in the United States or another developed country that have a sizable stake in emerging and frontier markets. "Don't think about the postal address of the company, think about the location of the customer," advises Jerry Webman, chief economist for OppenheimerFunds.
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In particular, companies in the healthcare, retail, and consumer staples industries are likely to enjoy significant demand in these economies. With their global wingspan, these large caps can give investors the best of all worlds, developing and emerging alike, without requiring them to research and place a direct bet themselves on foreign firms or to take a potentially riskier position in an emerging markets fund.
Even with growth stalling in the United States and the Eurozone, says Mark Luschini, chief investment strategist at financial services firm Janney Montgomery Scott, "many of these same companies are still earning nice revenue streams." They often pay attractive dividends, too.
Finding promising global giants might be easier than you think. Among the companies in the S&P 500 Index, some 45 percent of total sales come from outside of the United States, according to Standard & Poor's. Atlanta-based Coca-Cola Co., for example, earns about 60 percent of its revenue from outside North America. McDonald's and Procter & Gamble do a sizable portion of their business abroad, as do European-based firms like Germany's BMW and Switzerland's Nestlé. All of these companies pay out around $2 a share in dividends annually.
Strategists say that a lot of large-cap U.S. stocks are currently undervalued compared to small- and mid-size companies. International agricultural machinery company Deere & Co., for instance, was about $76 a share in late November, down from a high of about $100 over the past year, with a price-earnings ratio of about 11.5. General Electric was going for about $15 with a similar P/E ratio. It's important to find out if a company has found success in more than one location and under different market circumstances. In many cases, you can find out about a company's overseas exposure in the investor relations section of its corporate website.
A wide range of mutual funds give investors access to these large-cap companies. The Auxier Focus Fund, for example, counts Walmart, Johnson & Johnson, and Microsoft among its top holdings and has returned 6 percent annually over the past 10 years. The GMO Quality Fund, which holds Coca-Cola, ExxonMobil, and pharmaceutical company Pfizer, is up 6.3 percent over the past year. With some of your money deployed this way, says Luschini, "you know the sun never really sets on the company's business."
Gorillas aside, an adventurous way to take advantage of opportunities abroad is to invest in foreign companies directly. Jeff Applegate, chief investment officer for Morgan Stanley Smith Barney, notes that between 1999 and 2009, annual returns on equities in the United States and other developed nations were negative or flat while they were about 9 percent in emerging markets. If the prospect of international stock-picking is too daunting, Jeff Morley, vice president of portfolio consulting with Charles Schwab, recommends funds that hold leading companies in foreign markets. The Vanguard International Growth Fund and the Thornburg International Value Fund, for instance, have returned 6 and 8 percent, respectively, each year over the past decade.