With the Chinese economy lagging and places like Brazil experiencing political instability, investing in companies based in developed countries that do a lot of business in emerging markets is one way for pension funds to benefit from those economies’ growing middle classes while avoiding some of the risk, a U.S. portfolio manager said during an event in Toronto today.
Speaking at an investment event hosted by TD Asset Management Inc. today, William Booth, a managing director at Epoch Investment Partners Inc. in New York, cited Belgian brewing company Anheuser-Busch InBev, British consumer goods company Reckitt Benckiser and British-Dutch consumer goods company Unilever as good examples of companies in stable countries that are in a good position to capture growth in emerging markets.
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In terms of specific industries, Booth pointed to the commercial aerospace sector as one that can capture revenue from both developed and emerging markets. In countries like Canada, airlines are looking to replace their fleets or at least update their engines, while newly middle-class consumers in emerging markets are keen to hop on a plane and travel more. The French aircraft manufacturer Airbus, said Booth, has so many clients that if it received its last order today, it could remain profitable for the next six to 10 years.
Booth also highlighted the health-care and financial industries as good investment opportunities. While some pharmaceutical companies have recently received bad press for major price hikes, he cited oncology drug manufacturer Roche as being different. Currently, patients with the same type of cancer take the same drugs, to varying degrees of effectiveness. Roche, according to Booth, aims to improve outcomes by developing diagnostic tools that determine which drug is most appropriate for a patients based on their genetic makeup.
Read: Investing in emerging markets
In the financial sector, Booth suggested looking for companies that could return more free cash flow to shareholders. European insurer AXA, for example, offers a cash dividend yield of 5.74 per cent.
Booth also touched on the firm’s response to the British vote to leave the European Union. During the early fallout, Epoch exited from two investments and added to three others. The divestment may have been too hasty, Booth admitted, referring to the predictions of political unrest in Britain. But since Theresa May came aboard as prime minister so quickly, he said that other that a drop in the pound, the markets aren’t much different than before the vote.
In terms of the U.S. situation, Booth declined to make predictions about the upcoming U.S. election but did say Hillary Clinton would likely be better for the markets than the unpredictable Donald Trump.
Read: Brexit vote incites volatile market, stunning global investors
Also speaking at the event today was Michael Augustine, a managing director at TD Asset Management. Augustine spoke about liability-driven investing, an area he emphasized isn’t just about bonds and extending the duration of them. “In Canada, one of the challenges is that our bond market is extremely concentrated,” he said, noting the public market only offers so many options and emphasizing private debt as an alternative that can offer a premium for liquidity and uniqueness.
Among the trends in liability-driven investing, Augustine noted, is glide-path management in which some plans will take steps to lower their risked based on triggers, such as a certain level of funding status. But again, he emphasized that it’s not necessarily about moving out of equities in favour of bonds. “We do not advocate selling all of your equity position,” he said, adding it’s more a question of risk management.