Elizabeth Goes Multi-National

07/23/2004 12:00 am EST

Focus:

Elizabeth Bramwell

Senior Vice President, Sentinel Asset Management, Inc.

Elizabeth Bramwell is one of the best-known and most respected women in the financial world. Following her role as portfolio manager for Gabelli Growth, she founded Bramwell Capital in 1994 where she manages the Bramwell Growth and Bramwell Focus funds.

"You can grown more worldly by investing here at home," says Elizabeth Bramwell in a recent article from Louis Rukeyer’s Mutual Funds newsletter. "While many investors recognize the potential for capital gains from investing in rapidly growing markets, they’re scared off by the risk. But what if there were a way to get exposure to those markets without buying the stocks of small, unseasoned companies in developing nations? In fact, there is. Investors can get exposure to rapidly growing foreign markets by buying the stock of large, well-established companies that achieve significant portions of their sales and profits abroad. This table includes a listing of major American multi-nationals along with the amount of internationals along with their percentage of total sales:

Company
Symbol & Exchange
Total
Sales
(Billions)
Int'l sales %
Intel
(INTC NASDAQ)
$30.1
75%
Analog Devices
(ADI NASDAQ)
$2.0
74%
Applied Materials
(AMAT NASDAQ)
$4.5
74%
Colgate
(CL NYSE)
$9.9
72%
McDonald's
(MCD NYSE)
$17.1
65%
3M
(MMM NYSE)
$18.2
58%
American International
(AIG NYSE)
$81.3
44%
Cisco
(CSCO NASDAQ)
$18.9
44%
Pfizer
(PFE NYSE)
$45.2
41%
Stryker
(SYK NYSE)
$3.6
36%
Dell
(DELL NASDAQ)
$41.4
31%
Medtronic
(MDT NYSE)
$7.7
30%
Wal-Mart
(WMT NYSE)
$256.3
19%

"As the table above shows, many US companies derive more than half their sales from outside the US. Investing in such companies also provides informed geographic diversification by managements who have analyzed prospects of specific countries well enough to have confidence to place factories, equipment, and employees there. Companies have long expanded internationally to achieve growth beyond what their domestic markets could provide. The US population of some 288 million is only a small part of the world’s population of 6.1 billion. As free market economies evolve in developing countries and household incomes rise, so does the demand for goods and services. Market penetration is only just beginning in countries like China and India. In developed countries like the US and much of Europe, product replacement and scaling up are the leading drivers of demand.

"China and India have populations of 1.3 billion and 1 billion, respectively, representing 38% of the global population, and both countries have rapidly expanding middle classes as markets have become less regulated and more open. The demand for commercial food, health, and beauty products is evolving: the development of financial products such as mortgages and consumer credit is just beginning to facilitate and accelerate the demand for housing, cars, and appliances. The fall of the Berlin Wall in 1989 opened markets in Eastern Europe that were never expected to open in the near term. But the development of a large middle class in Asia may be even more significant to expanding the global economy. The populations are much larger, and there’s an ever-greater transition from agricultural subsistence to urbanization.

"China’s economy grew a robust 9% in 2003 and growth over the next five years should get a boost from the 2008 Summer Olympics, which will be held in Beijing. In the seven-year period before the 1988 Summer Olympics in Seoul, South Korea’s economy grew some 12% annually and its GDP per capita increased from $2,300 to $6,300. The country emerged as a major industrialized economy. More than $23 billion is expected to be spent by the Chinese government on modernizing and expanding the infrastructure to host this international event. Most construction is expected to be completed by 2004-2006. The Olympics are expected to increase China’s growth rate by 0.3% to 0.4% in the years leading up to the event and to facilitate China moving from a developing to an industrial country.

"Overall, we believe that we are in the early stages of a synchronized global expansion, so our outlook for the global economy and the equity markets is strongly positive. Investing in multinational companies can put one’s portfolio in front of such positive macro-economic trends as rising standards of living around the world. Capital spending is picking up globally in basic materials, infrastructure, and particularly technology. New generations of semiconductor equipment are being installed and new generations of mobile phones are expanding rapidly. We expect global spending to rise throughout 2004 and 2005. Additionally, interest and inflation are expected to remain low, and fiscal and monetary policies are both highly supportive to growth. Employment is expected to increase more rapidly in the United States. Corporate profits are expanding on reduced cost structures and the outlook for surpassing former peak operating margins is improving. Equity valuations appear attractive, with the S&P 500 index selling at 18 times estimated 2004 earnings and the 10-year Treasury note yielding only 3.7%."

Elizabeth Bramwell also notes, "The big surprise on our radar is that interest rates, which are low, could go lower. On a bell-shaped curve from 1950 to 2010, the midpoint is 1980. Rates went up the first half of this period and are coming down the second half, with incredible symmetry. At 2010 on this curve, long rates are at 2%. Money will flow where the most attractive returns are likely. Also, with T-bills yielding less than 1%, companies with solid dividends are an attractive alternative for many savers. Last year was the year rates came down. It was the year for the really stressed-out companies to recover. Dividend stocks will do better now. Take a company like Procter & Gamble (PG NYSE), yielding 1.8%. It increases its dividend every year. This is a large, seasoned company. You might be better off, in a diversified portfolio, having that rather than a money fund.

"We think that as the global economy improves we want to be in global financial companies that have close relationships with clients. We own Citigroup (C NYSE) and J.P. Morgan Chase (JPM NYSE). We also like Goldman, Sachs (GS NYSE) for investment banking and American International Group (AIG NYSE) in the insurance area. We think two growth areas are orthopedic-device companies and restaurants. We’re going to end up with amazing things like artificial cartilage. In the meantime we are getting minimally invasive hip replacement. Companies in this area are Stryker (SYK NYSE) and Zimmer Holdings (ZMH NYSE). Casual dining includes companies like Applebee’s (APPB NASDAQ) and Cheesecake Factory (CAKE NASDAQ), which benefit from families not sitting down together at home anymore, but going out to do that."

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