Punching Above Their Weight

07/26/2010 12:01 am EST

Focus: GLOBAL

Deborah Owen

Columnist, The IRS Report

The most successful UK companies have kept pace with the hottest emerging markets, writes Deborah Owen of The IRS Report.

The Financial Times described [UK Chancellor] George Osborne’s emergency budget as a “kill or cure” remedy for the UK economy. No one knows at this point whether the proposed fiscal retrenchment will tip the economy into a double-dip recession or not. Even the new Office for Budget Responsibility has admitted there are “huge uncertainties” going forward. But what does seem certain is that growth is going to be very subdued over the next few years.

The UK is not alone; most other European countries are introducing austerity measures which will depress growth. By contrast, some of the emerging economies have to tighten monetary policy because their economies are growing too rapidly and inflationary pressures are beginning to build up. As regular readers will know, I believe the industrialization of not just China and India but a raft of other smaller countries is tilting the axis of economic power away from the west towards the east.

As investors, it is essential that we invest in markets and companies that are at the forefront of these powerful secular trends. Looking at where a market or share price is now in relation to where it was in 2000 is a good indication of the strength of the industrialization effect. India’s BSE index is, for example, almost three times higher than it was in 2000.

Emerging markets used to be considered the wild west frontier of the investment world, and some people are still nervous about investing directly in them. In the current environment, one of the positive features of the UK market is its relatively high exposure to overseas markets. Approximately 70% of the earnings of FTSE 100 companies come from outside the UK.

The generator rental company Aggreko (London: AGK), for example, taps into the growing demand for energy from the east. And you do not have to just restrict yourself to the large-cap stocks. The engineering company Rotork (London: ROR) (which I recommended back in 2006) and the chemical company Victrex (London: VCTX) have both established a strong presence in the fast-growing areas of the world.

All three of these companies are in extremely strong up trends and their share prices are more than three times what they were in 2000.

There is often a mid-summer rally in the market but, as I mentioned last month, the autumn period could see a further sell off and so there could be a better entry point. But these are shares that are positively linked to the shifting economic landscape and they are likely to be swept along with it.

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