Walter Scott – Why Global Equities?

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  • 6 min
  • Global Equities, Walter Scott
  • 16 June 2020

Walter Scott[1] examine the argument that quality counts when going global

So why should stock market investors think globally when investing their money? The first point to emphasise is the sheer scale and variety of opportunities that are out there. The number of companies in which you can invest is expanding all the time and the choice is enormous. With critical data now available at our fingertips, investing in far-off businesses need no longer be a step in the dark.

By choosing to restrict yourself to a particular market, you will almost definitely be sacrificing some returns over the long term. Look at the UK, for example. While it’s packed with well-known banks and leading service providers, it is under-represented in pivotal sectors such as manufacturing and heavy industry. And if you are looking to share in the success of the technology giants, you’ll certainly have to go elsewhere.

Focusing exclusively on individual countries increases your risk because you are failing to heed probably the most important tenet of investing: do not put all your eggs in one basket. In 2019, for instance, those holding only UK shares suffered lower returns compared with global investors. This is largely because the uncertainty surrounding Brexit weighed on the performance of many British companies. So although it may be the case that the world’s stock markets move more in concert than they used to, their individual fortunes can still vary considerably.

This would be great news if you were an investor who could always switch between markets at just the right moment, but the truth is that getting those key tactical decisions consistently right is notoriously difficult. Indeed, the art of prediction is arguably more challenged than ever. 

In this context, a more effective approach may be to focus away from the many variables that can throw a short-term strategy off track and instead invest for the long-term in companies that have the qualities to be global leaders.

But what makes a strong global company? They come in all shapes and sizes and cannot be easily be categorised. However, we believe they will all possess a number of important attributes. 

Here’s our view as to what makes for a strong global company.

One of the most obvious qualities is innovation. Innovators never rest on their laurels and constantly seek to develop processes and technologies that will fend off their competitors and increase their lead. The phrase ‘innovate or die’ may sound dramatic but it neatly sums up the mantra of many of the companies that have successfully navigated the roughest economic waters in recent decades. 

Companies that understand that change is always around the corner and accept the need to adapt are also likely to be among the global leaders. This may often entail difficult decisions involving cost-cutting or restructuring. But it could also mean being responsive to new and emerging trends and reinvesting accordingly. When change is on the horizon, the winners will be invariably those who are boldest.

You might assume that to be a leading global company requires scale, and for the most part you’d be right. Having sufficient size to drive down overheads and other costs is a vital advantage in gaining that decisive commercial edge. But scale should not be the only differentiator. The companies with the best long-term prospects are often those with a defined business proposition that is difficult for their competitors to replicate. 

However, we believe it is important not to ignore the human element. A company may have the strongest competitive position possible but without a management team able to translate that into consistently market-beating results it will ultimately disappoint its investors.

In our view another vital criterion for qualification as a long-term global leader is sustainability. It is no longer acceptable for companies to conduct their business in a manner unnecessarily harmful to the environment or, indeed, its employees. While this is important from a moral standpoint, it should also be noted there is a growing body of evidence suggesting sustainability is a tangible driver for share price performance over the long term. 

Recent months have been among the most turbulent for equity investors in living memory. The Covid-19 pandemic has brought with it challenges that will test the mettle of even the most resilient business model. Nonetheless, many have proved remarkably robust in the teeth of the crisis and we would expect these companies to emerge from the current turmoil in a stronger position. The pandemic will also usher in changes that will bring with them opportunities, while accelerating a number of trends that were already in place. In years to come, industries as diverse as IT, healthcare, retail and travel will all trace fundamental operating changes back to the first few months of 2020.

The road back from Covid-19 looks likely to be long and challenging. However, we are confident that a strategy focusing on a diverse spread of world-class businesses with the resilience to withstand the inevitable headwinds will drive superior investment returns over the long term.

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[1]Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds. 

The value of investments can fall. Investors may not get back the amount invested.

Objective/Performance Risk: There is no guarantee that the Fund will achieve its objectives.

Currency Risk: This Fund invests in international markets which means it is exposed to changes in currency rates which could affect the value of the Fund.

Geographic Concentration Risk: Where the Fund invests significantly in a single market, this may have a material impact on the value of the Fund.

Derivatives Risk: Derivatives are highly sensitive to changes in the value of the asset from which their value is derived. A small movement in the value of the underlying asset can cause a large movement in the value of the derivative. This can increase the sizes of losses and gains, causing the value of your investment to fluctuate. When using derivatives,the Fund can lose significantly more than the amount it has invested in derivatives.

Emerging Markets Risk: Emerging Markets have additional risks due to less-developed market practices.

Counterparty Risk: The insolvency of any institutions providing services such as custody of assets or acting as a counterparty to derivatives or other contractual arrangements, may expose the Fund to financial loss