Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
Revisions to economic growth forecasts have come thick and fast this year, suggesting there remains significant uncertainty about the world outlook. The task has been unusually difficult. Forecasters have been required to take into account not only the bounce-back potential of individual countries based on longer term fundamentals, but also cases of Covid-19 and vaccine take-up rates.
The latest revisions came this week from the OECD. With world economic activity already back at pre-pandemic levels, growth is now expected to rise to 5.8% this year, significantly above the 4.2% projected in December. Of the world’s big nations, the US and China are expected to be in the lead with growth of 6.9% and 8.5% respectively1.
The OECD warns, however, the recovery will be uneven, owing to the risk of further coronavirus outbreaks with a large proportion of the world’s population yet to be vaccinated. Of the world’s major economies Japan stands out in this regard, with growth of just 2.6% anticipated this year2.
From an investment standpoint, a degree of uncertainty often creates opportunity. An important task this year, as in any other, is to identify where attractive growth opportunities intersect with overly pessimistic expectations.
Recent years have shown opportunity can turn up in relatively unexpected places. In 2019 Greece was a standout performer. Last year, Vietnam, South Korea and Denmark – the latter with its recession resistant healthcare and pharmaceutical companies – were among the best places to be3.
As the small band of technology stocks that led the S&P 500 higher for much of 2020 have shown, owning the right stocks can be just as important as investing in the right market. Investing globally effectively widens the net, enabling investors to gain an exposure to best of breed companies wherever they might be. With the UK accounting for less than 4% of the MSCI World Index, it’s statistically unlikely that most world leaders will be British4.
Japanese carmakers already have a sizeable lead in hybrid and all-electric vehicle technologies, and we’ve all heard of Tesla and its remarkable share price history. However, amid booming Chinese passenger electric vehicle sales, it was the Chinese EV carmaker NIO that stole the show in 2020 as one of the world’s best performing blue chip stocks5.
So far in 2021, European markets have shone, despite Europe having lagged behind in the rollout of vaccines and the OECD’s assessment that much of the region could take an additional year to bounce back. That doesn’t seem to have put off investors seeking a bargain though. Even after their recent strong gains, European companies trade at an approximate discount of 19% to their US peers on the basis of the amounts companies in both regions are expected earn over the next year6.
Yet quite a number of European companies have world famous brand names bound to do well as consumers look to deploy the savings they accumulated during 2020. The demand from fashion conscious shoppers in both developed and emerging markets for European luxury goods already appears to be bouncing back. LVMH (Louis Vuitton Moët Hennessy) says sales at its leather goods business were 37% higher in the first quarter compared with the same period (pre-pandemic) in 20197.
Emerging and frontier markets are more tricky. Dispersed populations and compromised logistics in some cases count against the smooth rollout of vaccines and the OECD expects economic recoveries to be delayed as a result. Moreover, those countries that are deemed to have handled the coronavirus well – such as China, Taiwan and South Korea – have already seen their stock markets recover strongly.
Even so – and despite the rapidly growing importance of domestic consumption trends – economic growth in emerging markets has historically shown a good correlation with a weaker dollar – as we have now8. This has a lot to do with incomes rising for commodity producing countries as the dollar prices of commodities rise.
With oil back over US$70 per barrel and metal prices fizzing in expectation of a further rise in federal spending in the US, this bodes well for a diverse range of countries including Russia/Nigeria (oil and gas); Brazil (iron ore and oil); Chile (copper) and Indonesia (coal). The MSCI Emerging Markets Index currently trades on an undemanding multiple of around 15 times this year’s earnings9.
There can be additional risks to investing overseas – for example, political and currency risks – but these have to be balanced against higher prospective returns in most cases. Some risks can be reduced or circumvented by an actively managed fund spreading its assets across companies and sectors.
Fidelity’s Select 50 list has a wealth of funds offering investors an exposure to world markets, by region or globally. The Rathbone Global Opportunities Fund is one of the latter and an interesting choice for a number of reasons.
This fund invests in a relatively small number of stocks – currently 60 – with a firm focus on fast growing companies in developed countries that are “shaking up” their industries. US companies currently account for 63% of the fund, which may seem a lot. However, this is only about 5% higher than the US weighting in the MSCI All Countries World Index (58%)10.
To reduce risk, the fund also has a number of holdings in businesses exhibiting slower, steadier growth too. The fund’s largest holdings are currently: PayPal; the international provider of laboratory equipment to the biopharma industry, Sartorius Stedim Biotech; Amazon; and Nvidia, the computer gaming graphics specialist now also engaged in artificial intelligence11.
1'2 OECD, 31.05.21
3 Bloomberg, 03.06.21
4'6'9'10 MSCI, 30.04.21
5 CNBC, 04.01.21
7 LVMH, 13.04.21
8 IMF, Working paper, Collateral Damage: Dollar Strength and Emerging Markets’ Growth, July 2015
11 Rathbone Unit Trust Management, 30.04.21
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. Overseas investments will be affected by movements in currency exchange rates. The fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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