Julie Edwards, a portfolio strategist at Fidelity Investments explained the fundamental shift in the...
Julie Edwards, a portfolio strategist at Fidelity Investments explained the fundamental shift in the way companies are researched.
"It is increasingly making sense to invest on the basis of sectors rather than geography," explained Edwards. "The brokerage community has adopted this approach in company research and buy-side houses are also moving this direction."
Companies are increasingly global, and therefore value added in the research process will come from analysing companies on a global basis - not just on a regional basis.
Standardisation has been another factor pushing globalisation along. Adopting global standards has reduced the cost of entering a new market compared with the past. This means that the same product can be sold in all markets without having to go through costly procedures of approval in every single market.
"These developments continue to evolve - they are ongoing and will remain important for some years to come," said Edwards.
Choosing the winners and losers in this now global arena demands that companies need to be analysed on the basis of sectors - and increasingly on the basis of global sectors.
This is an environment where individual stock selection will become more important, and will generally add more value than country-based research.
"A good example of the need for global sector research is the auto industry," said Edwards. "If you take the German car market then you might consider a competitor of VW to be BMW but VW's franchise is far wider than just Germany. In recent years, Brazil has been a big contributor to profits/sales growth at around 20% of the total. So if you really need to know what's happening to VW's profits you can look at its competitors in places such as Brazil. So, now you are talking about General Motors, Hyundai and Toyota, as well as other European auto makers."
Recent research by Goldman Sachs shows that, at the end of July 2000, the global sector effect accounted for 18% of all variation in global share prices. It was therefore more important than either local market or global market effect, each of which accounted for 15%. The remaining 52% were stock specific effects.
The research also found that with the largest stocks, the sector effect on share prices is even more pronounced than with the average. Edwards said: "For the world's largest 500 stocks, the global sector effect accounted for 28% of all global stock variation while the stock-specific influence declined to 44%."
Given these trends, an investment research team has to focus on the entire worldwide market, rather than on individual countries. It is crucial that analysts communicate in order to ensure, for example, that the global factors that affect a European company are known to the analyst located in London. If the analyst is looking at a multinational European company, he needs to understand the company's operations outside Europe. It helps to be able to talk to analysts familiar with the foreign markets in which the company is active.
"Valuation methods need to become more sophisticated to reflect the complicated business operations generating the company's profits," said Edwards.
Lastly, the thinking of international investors has to be considered, as increasingly they are influencing share prices. Tax issues, expectations of currency moves or simply issues of confidence in the government or working of a local stock exchange, can all affect the foreign investor. "It is in our interests to be aware of their interests," said Edwards.
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