Emerging markets bring competition
European governments continue to wrestle with the problems of insolvency and lack of competitiveness in peripheral nations such as Greece and Spain.
But many international companies with European listings are getting on with the day job - attempting to grow their businesses in other parts of the world.
One of the main potential revenue sources for many global companies headquartered in Europe has been the extraordinary opportunity presented by emerging giants such as China and India over the last decade.
However, while much of that opportunity persists and should ultimately expand, in the wake of the eurozone crisis and higher oil prices there have been signs of slower growth and increasing domestic competition in these markets. As a result, it is becoming more important than ever to be highly selective when making investments, a development that should be positive for skilled stock-pickers if they can get it right.
For us, these sorts of global companies remain attractive and we continue to believe in the extent of the opportunity available, especially relative to the sustained period of low growth we expect in Europe and the West. However, we are also aware that doing business in these markets is not easy, nor is generating a sufficient return for the risk taken. This is especially the case for some European industrial companies, whose power generation arms have begun to face tough local competition in some emerging markets. This in turn has caused downward pressure on prices and ultimately profits.
We have seen similar developments in the alternative energy market. For example, solar power was initially seen as a market with some very attractive possibilities, given the widespread need for cleaner energy supplies and energy security. However, profits were soon eroded by overcapacity and an influx of cheaper products from Asia. The same thing happened with wind turbines.
In our recent conversations with engineering companies, this topic has been clearly identified as one of the key challenges that Western corporations have had to deal with: how to protect the intellectual property of their products and ensure that their profits are reliable. One of the key things we look for when considering investing in a company is whether its product is easily replicable and if there are high barriers to entry. Too often investors have been caught out by companies posting unusually high profits as their product hits the market and then finding later that these are unsustainable. This has been particularly true for some European automotive companies.
Instead, we prefer to invest in businesses such as airport franchise Dufry, which is benefiting from drivers of structural growth such as increasing passenger traffic and is well placed to capitalise on future airports in the developing world, of which there is a considerable pipeline. It and other consumer-facing companies should also benefit from wage inflation as the rise in average incomes reaches a tipping point at which goods suddenly become available to a much larger section of society.