In Cleaning up, we used the example of Johnson Services Group, the UK’s biggest drycleaner, to show that, even if a company is operating in what would appear to be an unpromising area, it can still grind out decent results. Shifting completely to the other end of the spectrum – from a smallish UK-focused business to the largest stock market in the world – we can see something similar.
According to analysts at Morgan Stanley, since the middle of 2010 the US’s broadest market index, the S&P 500, has outperformed the rest of the world (excluding the US) by some 20%. this may be attributable to any number of things – the US’s status as a so-called ‘safe haven’ for investors, the attractions of the dollar and so on – and is unlikely to come as too much of a surprise to you.
The identity of the type of businesses driving that outperformance, however, might just do so. After dividing the S&P500 companies into ones that generate the great majority of their earnings within the US and those that on average generate 60% of their revenues from outside the US, the Morgan Stanley analysts found the group with a domestic focus had, since the middle of 2010, outperformed their more international-facing counterparts – again by some 20%.
Drilling down even further to ascertain what has driven that disparity, the analysts found the earnings estimates of the domestic group had outperformed the earnings estimates of the international group by a similar percentage.
So, despite what many people might say about the potential of the emerging markets, for example, or the economic and fiscal difficulties the US may or may not be facing, the above data suggests it is actually the more domestically focused US companies that have served investors best since mid-2010. What is more – and similar to what we saw with Johnson services – that is not down to sentiment or multiples but solid growth, or in many cases recovery, in profits.
Here at the value perspective, with our portfolios full of UK-focused stocks, it is interesting and instructive to find yet further evidence that, no matter how attractive other markets may seem at various points in time, they can always look inferior to cheap stocks, at a trough point in the cycle, whose profits have the potential to recover and normalise.
That is a significant part of what has been happening in the US in recent years – most obviously in the construction sector, which was so exposed to the domestic housing crisis. And it illustrates once again that, if bought at the right valuations, even stocks that seem very dull compared with more exotic and exciting markets around the world can have their time in the sun – and help their investors to as well.