Investing in international markets makes sense from a diversification perspective, particularly as Australia’s market is miniscule relative to global peers. It is also highly concentrated towards a handful of companies, tilted towards mining and banking.
Investing in niche businesses with a global footprint can be an ideal way to gain international exposure, without actually investing in companies listed on international stock exchanges or pooled investments. It is a matter of finding companies to provide that international exposure. In their respective markets, Amcor, 21st Century Fox and Ansell stand out as industry leaders, offering targeted market exposures with international cash flows.
Once Amcor spins off its Asian-focused operations covering packaging and distribution from the more internationally-oriented flexible and rigid plastics, it will generate an estimated 90 per cent of sales offshore. Amcor largely operates in duopoly and oligopoly markets, placing itself in a position to have pricing options and maintain market share. Specifically, Amcor offers investors direct exposure to personal care, foods and home care packaging – all items typically purchased regardless of economic conditions.
Capitalising on the US entertainment market is 21st Century Fox. Reporting for the September quarter, cable network growth posted a rise of 12 per cent in revenues. Future earnings will be driven by subscription revenues, which are normally high margin. There is room for improvement from Fox, with the strength of the Australian dollar softening final numbers for the quarter. A depreciating Australian dollar will alleviate these headwinds for future reporting periods.
Following Ansell’s acquisition of BarrierSafe Solutions, the company will expand its offering across the industrial segment, propelling Ansell to be number one in most sub-segments it operates in. Even in a tough climate over the past financial year, Ansell managed to lift sales by 9 per cent against the previous year. It has the lion's share of the fragmented protective gloves market, with 12 per cent of the market.
Being in a niche market is only one part of the investment criteria. There are companies such as Cochlear operating in very defined markets. Despite this, Cochlear faces falling market share and cheaper alternatives, detracting from potentially attractive investment characteristics.
Another aspect of the decision to invest in companies with international cash flows comes down to the future direction of the Australian dollar. Glenn Stevens and some members of the Reserve Bank of Australia have been trying their best to talk down the currency. While the Australian dollar has been stubbornly strong, lower commodity prices and a potentially reduced cash rate theoretically should encourage the domestic currency to find lower ground.
A weaker currency and strong growth potential in international markets will give selected companies an edge.