Short-term traders may try to capitalise on the volatility day-to-day by jumping in and out of the market as sentiment shifts between risk-on and risk-off in response to news developments about the crisis. For fundamental managers, however, the market gyrations are little more than noise that don’t detract from a long-term investment thesis.
Such periods of uncertainty reinforce the importance of a focus on high quality investments, and in particular ones with business models and revenue streams that are broadly diversified across a variety of characteristics, including geography, that are well-positioned to withstand market volatility. A global research team can be an important asset in uncovering such opportunities.
While a London-based portfolio manager or team may be best-positioned to liaise with the management of UK companies, many of these are multi-national businesses with substantial portions of their revenue streams derived from other countries, including increasingly the emerging markets.
Such companies (GlaxoSmithKline, BP, Diageo et al) are subject to supply chain and end-user demand factors that span the globe. Analysing securities on a global basis offers an investment manager several advantages. It creates a baseline for comparing valuations across geographies, sometimes leading to a discovery that a higher earnings growth rate can be bought for a lower multiple at a company in one part of the world than at a similar company in another part of the world, even when their economies and geopolitical risks are not dramatically different.
For a UK manager this can either help to increase conviction and therefore position size if the valuation is more favorable for the UK-quoted stock, or vice versa if it is found that domestic stocks are screening expensively compared with similar peers.
To understand the drivers of growth for UK-based spirits distiller Diageo, for example, it is critical to understand the Asian market.
The rapid emergence of a middle class in many of these developing nations and the accompanying demand for high quality brands such as Johnny Walker scotch and Tanqueray gin fuels faster growth for the company in this part of the world than in its more traditional developed world markets, where overall growth rates are impeded by the debt overhang.
Similarly, while UK-based Vodafone is domiciled in a fairly saturated market for its product, the stock’s value becomes more apparent when one considers its 49% stake in Verizon Wireless in the US. In that sense it is more of a pure play on the dynamic wireless business than Verizon itself, whose stock is weighed down by the company’s increasingly obsolete wireline business.
Vodafone also has a growing stake in emerging markets such as India, a long-term play which in the near term can have volatile effects on cash flows. For companies with assets spanning such a diverse geographical footprint it is extremely helpful to have local analysts with a close understanding of every one of those assets working in concert, rather than looking at the company merely through a UK or European lens.
Similar observations could be made with regard to HSBC and Standard Chartered, two large UK-domiciled banks with predominantly Asian and North American businesses, or the large mining companies such as Rio Tinto, which are truly global in nature.
In sum, analysing stocks on a global basis allows us to make better decisions locally.