Monday, 26 September 2011

Seven reasons why you should invest in global mega-caps

You may not remember the "nifty 50" – it's 40 years since this group of giant US multi-nationals carried all before them on Wall Street – but in a week in which Ben Bernanke reprised a 50-year-old approach to monetary stimulus, they are worth another look.

By Tom Stevenson

8:30PM BST 24 Sep 2011

The reason I'm casting my memory back to a list of companies from the high watermark of American corporate dominance is because I think investors could do worse than start thinking about a portfolio of "neo-nifties". For a handful of reasons, I think global mega-caps might be set to enjoy another moment in the sun.

Looking at the original nifty stocks, some evocative names have fallen off the corporate radar – whatever happened to Simplicity Pattern and International Telephone and Telegraph, for example? But others have stood the test of time: Coca-Cola, Philip Morris and Halliburton are still very much at the top table of American corporate life.

Back in the late 1960s and early 1970s investors were drawn to this list of large-cap stocks with powerful brands, dominant market positions and a history of paying growing dividends. They were considered classic buy and hold stocks, and because so many investors did just that their valuations rose and rose to levels at which inevitably they turned from being excellent investments to, in some cases, dreadful ones.

For those who went along for the ride, however, they provided excellent returns. So why do I think this kind of share might be the place for investors to look in today's challenging markets? Here are seven reasons.

The first advantage of today's international corporate titans is that they provide the kind of safe haven that until the financial crisis was the preserve of government bonds. Even if you disregard the obvious basketcases on the European periphery, the downgrade of US and Italian sovereign debt this summer shows that the idea of risk has been turned on its head in recent years. Add to that the risk of capital loss on government bonds which have risen so far they now yield less than 2pc and the shares of the largest companies look like a better harbour in the storm.

Big, international companies often have better pricing power than their smaller counterparts, too. This will be particularly important in a stagflationary environment in which sluggish economic growth is coupled with a rising cost of living.

This kind of company tends to also benefit from a stronger balance sheet and, therefore, better access to credit than smaller companies which are more dependent on bank finance. As banks look at each other with rising distrust, the ability to raise debt finance (in some cases to retire undervalued and so expensive equity capital) will be key.

That balance sheet strength underpins another important advantage of the new nifties – the ability to pay a sustainable and rising dividend stream to income-hungry investors. If one thing is clear from the string of gloomy assessments last week from Bernanke, the IMF and others, it is that interest rates will stay close to zero for the foreseeable future.

Parts of the fixed-income market will be able to satisfy the consequent desire for yield, but many investors – pension funds and individuals alike – will be prepared to go further up the risk scale to get the income they need.

Geographic reach – another feature of the largest companies – also looks like a major advantage in a two-speed world in which the best opportunities are to be found in the emerging markets of Asia and Latin America. Smaller companies are usually more dependent on their domestic market, which for investors in the UK, US and Europe looks like being a comparative disadvantage for the foreseeable future.

As well as this greater geographic spread, the biggest companies are also usually more diversified. In a rapidly-changing world, having your eggs in more than one basket represents a big reduction in investment risk.

The final and arguably biggest reason to look at today's nifty 50 is that large companies look cheaper versus smaller stocks - after 11 years of under-performance - than they have for at least 20 years. As the most important pre-condition for a satisfactory investment return is starting valuation that represents a huge edge.

Of course, the original nifty 50 was a purely American phenomenon. In today's global market there's probably a case for a broader portfolio. The "weighty 80"? You read it here first.

Tom Stevenson is an investment director at Fidelity Worldwide Investment. The views expressed are his own. He tweets at @tomstevenson63.

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