UN-Investible Growth?

In most cases, growth is good.  Growth is progress. Growth is possibility. And growth is the natural result of moving positively toward the future. Astute investors constantly scour the universe for profitable growth. It is done by examining growth rates, normalizing growth rates, and estimating growth rates.  Revenue growth must be traced as it moves through a company’s financial statements. The growth rates of revenue drivers are critical to understanding sustainability. The astute analyst will even evaluate the growth in the number of employees to gain an understanding of cost growth. Over the years, the holdings of a well managed stock portfolios will span the growth spectrum.  Successful investors will chose and continue to hold shares in relatively young companies that are growing at triple digit rates as well as large, stalwart companies that might only grow at low single digit rates.

The most difficult element of investing is that the appreciation in a stock’s share price does not necessarily match the growth rates of the company. And today, in an increasingly globally connected world, there is another hurdle when it comes to growth rates not matching up; growth rates of a nation’s economy does not necessarily match the stock prices of companies that are operating within that economy.  Case in point: China. Many domestic investors have begun to actively invest in companies that are based in China.  Successfully participating in the rise of the Chinese middle class, the insatiable demand of the Chinese, the rise of disposable incomes, as well as the disciplined and competitive culture is an exciting prospect.  An alternative would be to consistently invest in companies with a strong international presence including China.

Beijing Skyline

Although hundreds of companies based in China are listed on domestic exchanges, very few meet high standards required for those who require a full understanding and careful inspection before they leap. The walls of Chinese government ownership, strict industry specific laws, uncertain future taxation, or relationships with subsidiaries are hard to climb over in most Chinese companies. In many situations, the cultural boundaries are simply insurmountable for the informed investor.



Great Wall of China



Lately, global investors have become increasingly skeptical of many Chinese companies and their accounting practices. This too has weighed heavily on the performance characteristics of many Chinese-based shares despite 30% plus organic growth rates.  Subscribing to the where-there’s-smoke-there’s-fire theory, causes some professionals to believe that the shares of many innocent companies are being assumed guilty by association in the Chinese equity universe.  Only time will tell which Chinese managements are accurately reporting. This is not a problem confined to China. 

Hong Kong Syline

In the meantime, trying to invest in Chinese companies requires the utmost faith in management teams that are half way across the world. Returning to this side of the world, the difficulties the United States has experienced over the last twenty-four months has only reaffirmed most professional investor's faith in solid domestic companies that maintain strong international operations. 

Few  managements stateside have successfully navigated the cultural, legal, political, and geographical challenges that international expansion presents while running companies exhibiting characteristics that adhere to rigorous business, management, financial and valuation tenets. On the rare occasion when an investor is able to identify these kinds of situations, taking positions is likely to enable them to be more successful. It is reasonable to expect that stock portfolios’ performances can be enhanced more by these types of holdings than by positions where listening to late night conference calls that vacillate between Mandarin Chinese and a translator’s choppy English is required to stay informed.

Moving to other Asian investments it is noteworthy that countries such as Russia, India and Korea, each in an era of expansion and development themselves, face enormous obstacles as their populations try to adapt to the post financial meltdown realities. Severe poverty can easily derail growth and derail the most focused of management teams. There are other pockets of growth in our own hemisphere. These also offer unique challenges as well as growth.  Brazil is also experiencing strong growth, rising incomes and improving infrastructure.  However, neighboring countries and their governments are creating a volatile environment for Brazilian management teams.  In the end no investment is without its risk, however, emerging economies, though producing enviable Gross Domestic Product growth rates, present additional risks that are often difficult to understand and are even more difficult to navigate. 

Jim Spence

By no means shold a reader conclude that non-domestic growth is permanently un-investable. However, for the U.S. investor, domestic companies with strong international presences have been reaffirmed.  Other countries and their most successful businesses should remain on foreward looking radar screens; as their evolution is changing the face of global investing as we speak.

Jim Spence is portfolio manager at Spence Asset Management, Inc.