Location still matters in global trade scene

WITH globalisation and similar issues being paramount in the discussions of a number of people and groups, it is an opportune time to look at whether the choice of country in an investment decision is important.

Should investment managers ignore where a particular company is in the world and simply invest in the company if it is undervalued?

AMP Henderson chief global economist Dr Shane Oliver is one who believes it is inappropriate to ignore countries and regions. His latest analysis draws on work done by Henderson Global Investors in the UK.

“Ten years ago, international investment managers pondered whether to move out of Germany into Japan. Now they increasingly focus on whether to sell global telecommunication stocks to buy global retailers,” Dr Oliver says.

“The cause of this is globali-sation.

“Globalisation, which at its purest is the free flow of goods, services, money and people around the world, has dimmed differences between the economic perform-ance of countries/regions, while internationalising industries”.

Dr Oliver reviews the statistical evidence and suggests the studies certainly support the view that sector influences are growing in importance. As he sees it, the results broadly indicate that:

p until about three or four years ago, country factors dominated industry factors in explaining the returns from individual shares; but

p in the past few years, the explanatory power of industry factors has risen rapidly, while that of country factors has remained steady, or deteriorated (depending on the methodology used in the study).

While the stock-specific influ-ences remain as important as ever, during the past few years, global sector influences have increased in importance at the expense of local market (or country) consider-ations.

When the Australian market is examined on the same basis we find that similar trends also are apparent. With Australian shares, the declining importance of the local equity market relative to global sector influences in the determination of individual stock returns is even more significant. This may be a reflection more of the size of Australia’s market relative to the rest of the world.

Dr Oliver is careful to point out that, before reading too much into these trends, it is worth recalling that, during the past decade, global share performance was driven at some points by country or regional developments and at other times by industry sector forces. He cites three episodes that are more reflective of regional influences:

p the Japanese market bubble of the late 1980s and its subsequent collapse through the 1990s;

p the spectacular rise of the Asian “tigers” in the early 1990s; and

p the Asian crisis of 1997-1998.

He contrasts that with the events of the past three years, which has been dominated by the growth and subsequent bursting of the “bubble” in technology stocks. In both the phases – the rise and the decline phase – the relative weighting that an equity investor held in technology, media and telecom stocks versus other industry sectors almost irre-spective of geographical distri-bution, was the key driver of performance.

In Australia we saw similar happenings, with stocks such as Solution 6, Sausage Software and Davnet, among others, being driven by global sectoral influences.

Dr Oliver’s conclusions are that, as the world continues to globalise and become more integrated, it is reasonable to expect an increase in global sector influences. He does not believe country or regional influences will cease to be important over the next few years.

“Once the aftermath of the technology bubble has settled, we believe it would be a prudent to assume that, for the next 10 years, regional and sector influences are likely to be of a similar size and each will have a significant impact from time to time,” Dr Oliver says.

“Therefore, global investors should aim to incorporate both regional and sector aspects into the portfolio construction process.”

So, in answering the question as to whether the country matters, it would seem that despite globali-sation and a sense of equalisation across countries, there are times when only regional factors matter. Conversely, there are times when global factors may impact on stocks.

As Dr Oliver concludes, it is important that we assess both types of factors in selecting our stocks and constructing our portfolios.

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