Should we invest in Sectors or Countries? And what about Genesis (a Utility)?

Exxon Mobil and Apple vie for the position as the largest public company in the world - by market value.  Each are US giants and each is valued at over $400 billion USD.  Exxon Mobil is in the energy sector (along with Chevron in the US top 20) and Apple the Information Technology sector (along with Microsoft, Google and IBM).

The 10 global International Classification sectors are allocated into five geographic regions.  The 5 regions being – US, EAFE (Europe, Australasia, Far East), Europe, Japan, Emerging Markets.

The 10 sectors being:

            Consumer Discretionary (Toyota, Walt Disney, Home Depot, Daimler)

            Consumer Staples (AmBev, Nestle, Anheuser-Busch, Proctor & Gamble, Coke)

            Energy (Exxon Mobil, PetroChina, Chevron, Royal Dutch, BP)

            Financials (Berkshire Hathaway, JP Morgan Chase, HSBC, CBA)

            Healthcare (Johnson, Roche, Novartis, Pfizer, Merck)

            Industrials (General Electric, Siemens)

            Info Tech (Apple, Microsoft, Google, Samsung, SAP, IBM)

            Materials (BHP Billiton, Monsanto)

            Telecom (AT & T, Verizon, Vodafone, China Mobile)

            Utilities (None make up the top 20 US or world).

I’ve provided examples of the top 20 companies (the only exception is Monsanto) which qualify in either the US top 20 or the World top 20 per market capitalisation.

The superior long term returns of equities (stocks, shares) is not unique to US.  However until the late 80s, international markets were almost exclusively the domains of local bias and native markets.  One of the reasons New Zealanders were so affected by the 1987 share market crash was – local bias, another – the inability to easily and cheaply access and administer overseas stocks.

At the end of WWII, US stocks composed almost 90% of the world’s equity capitalisation (the value of all publicly listed companies) in 1970 - they made up two thirds.  But today the US market constitutes less than half of the world’s stock values (47%).  The developed world’s (US, Canada, UK, Europe, Japan, Australasia) percentage is still high at over 85% - but that percentage is declining.  The developing world (Singapore, South Korea, Taiwan, Hong Kong, China, Indonesia, Mexico, Latin America, Middle East, Africa, Malaysia, Thailand, India, Russia, Turkey, Philippines, Portugal) is now producing more than one half of the world’s GDP – a fraction that will expand to two thirds in the next 20 years.  But the prospect of economic growth is not the reason why one should invest globally.

There is negative correlation between economic growth and stock returns – in the developed world and in the emerging markets.  The reason for investing internationally is to diversify your portfolio and reduce risk.  Foreign investing provides diversification.  It would be poor investment strategy to pin your hopes on just one stock or one sector of the economy (i.e. NZ 1987 Commercial Property – 2000 IT companies worldwide, 2008 finance sector).

From 1970 to the present (2013) dollar returns among different regions do not differ greatly – but the stock prices of different countries do not rise and fall in tandem.  Combining these assets will lower risk of your portfolio for a given return or alternatively raise the return for a given risk.

US                               9.39%

EAFE                           9.74%

Europe                       10.33%

Japan                          9.15%

(from 1988)    

                Emerging Markets       12.73%

My real point – why are New Zealanders so hung up on the government managing and owning power companies (utilities).  The greatest economic development in the world has come from US – from the transition of an agrarian nation to an industrial and now an information technology service nation.  US is much privatised (47% of world capital markets) Russia, Middle East, Eastern Europe, China, India (5% of world capital markets) predominantly government owned companies.  Whilst governments may well own great resources (Saudi Arabia and Russian Oil and Gas resources are a good example) there is good evidence that privatised firms often experience efficiency gains.  In NZ where the sale of government shares in power companies and Air NZ have given a welcome boost for the capital markets – the ultimate test will be in the long term – governance arrangements and competitive markets should have created better companies.  Genesis Energy shares will list on April 17 at $1.55 a share.

Proceeds from the four partial privatisations will bring the total to $4.7 billion NZD.  Those sales saw 49% of the state controlled power companies (Mighty River Power, Meridian Energy (1.76 and 1.96) and reduced government shareholding in Air NZ from 74% to 51% ($365m)) – sold into private hands.

A citizen’s referendum last November found two thirds of those who voted opposed the policy.

Whilst the greatest economic power in the world grew to such status through privatisation and the emerging markets of the world are gradually following this example – our financial and economic decision making is mired in political spin and lack of economic reality.  Solid Energy and the recent fraud exposure of a former Mighty River Power manager are examples of state run business governance.  Do we need more examples – ACC, Health, Education – public company governance is far more likely to extract efficiencies – surely that’s what we need.

As for the sector and Genesis (utility/energy) – could be, should be an ok yield for those investors requiring income.  As for the country – NZ (part of EAFE) should be part of a diversified portfolio.  As for owning the individual share (that would depend on your plan!)  As for the company itself – well I think it’s well named – perhaps it really is the ‘origin or development of something’ – perhaps that something can be a greater interest and awareness of economics and finance.

I certainly hope so.

The information provided in this blog is not intended to be a substitute for professional advice. You may seek appropriate personalised financial advice from a qualified professional to suit your individual circumstances.