Seizing global opportunities

“The only thing constant in life is change,” wrote Francois de la Rochefoucauld in 1665.

The French philosopher and nobleman was commenting on life in early modern France, a period of political intrigue, war and economic upheaval.

Sound familiar?

Some 350 years later, Rochefoucauld’s famous maxim is as relevant as ever, especially for investors with an eye on global markets.

In 2011, change is the only certainty. We are living in a volatile period of rapid growth and development that is unprecedented in historical terms.

1989 marked the end of an era in politics and economics. In Europe, the Berlin Wall that divided east and west for decades collapsed. In China, thousands of protestors demanded economic reform in Beijing’s Tiananmen Square. Emerging markets were a wobbly and high-risk proposition. A scant eight countries comprised the MSCI Emerging Markets Index. Brazil grappled with runaway inflation and a staggering debt of $109-billion; and Hong Kong’s Hang Seng Index traded in the anemic 2,800-point range.

Twenty-two years later, the world is a very different place. Emerging markets are the world’s fastest growing economies with new consumers in Eastern Europe, the Americas and especially Asia hungry for good and services.

We’ve witnessed a remarkable reversal of economic fortunes. Today, the United States and the mature economies of Western Europe are struggling with debt and slow growth. In contrast, Brazil, the former basket case of South America, is now an investment grade holding.

In 1989, a free market was a pipe dream for citizens of what former U.S. president Ronald Reagan famously dubbed “the Evil Empire” now there are 279 publicly traded companies in Russia. The Hang Seng Index today trades in the 24,000-point range. Membership in MSCI’s Emerging Markets index has grown by more than 300% to 26 countries.

The rise of the middle class means more disposable income – and more spending. In 2009, an estimated $21.3-trillion was spent by the world’s middle class. That figure will balloon to $35-trillion by 2020 and climb again to almost $56-trillion by 2030, reports the OECD. It’s estimated the emerging nations of the Asia-Pacific region will account for an ever-increasing portion of this massive spend, soaring to 59% by 2030.

Companies around the world are linked together like never before. Apple Inc.’s popular iPhone is a great example of interconnected global commerce. The communications device is engineered in Cupertino, California and manufactured in China, with parts from all over the world. Taiwan’s TPK Holding Co. Ltd. builds the Apple touch screen; Japan’s AKM Semiconductor Inc. the compass feature; Infineon Technologies AG of Germany the transceiver and the Samsung Group of South Korea the processor.

A look at stock market returns shows investors ultimately benefit when they focus on companies that exploit our changing world and adopt a global outlook. At Franklin Templeton, we reviewed the 20-year returns of publicly traded companies that comprise the S&P 500, a list of the large-cap common stocks that trade in the United States. Between 1990 and 2010, the share prices of companies that report less than 50% of their pre-tax income from foreign operations grew an average of 612% in value. In comparison, companies that earned more than 50% of their pre-tax income from foreign operations during this same period reported a stock price increase of 802%. That’s a difference of 190%!

The message? Increased global exposure and earnings make for better performance on the stock market.

A growing list of the world’s leading firms are getting the message and shifting their focus to global markets, especially the Asia-Pacific region. Drug giant Pfizer Inc. of New York generates 57% of its sales outside the U.S. market; automaker BMW AG generates 81% of its sales outside of Germany. Closer to home, Research in Motion Ltd., maker of the BlackBerry, generates 94% of its sales beyond Canada. It’s hard to imagine what the economic health of these global leaders would look like today without their international focus.

Globalization is here to stay. Companies need to think beyond their borders and understand the needs of new markets. Businesses that understand the dynamics of the global marketplace are poised to win and reap the rewards.

It’s a lesson investors also need to heed. A confluence of factors makes it a perfect time for investors to increase their global exposure. Our strong Canadian dollar means stocks around the world are on sale. Certainly, Canada’s domestic stock market has made impressive gains in recent years but it’s very near its historic peak. Going forward, Canada’s returns may lag in relation to global markets.

Perhaps most importantly, there is little diversification at home. Three sectors—financial services, raw materials and energy—make up about 80% of the value of the Toronto Stock Exchange. For every investor, diversification across many asset classes is key to improving returns and limiting risk.

Unfortunately, too many investors are in a cautious mood, either sitting on the sidelines or keeping their investment dollars at home. It’s critical for them to get back in the markets and take advantage of global opportunities if they wish to meet their long-term goals.

I urge all investors to talk to their investment advisors and review their portfolios at this critical juncture in the market.

As Rochefoucauld said, change is constant. It makes sense for investors to take advantage of our changing world and seize the opportunity in global markets.

Don Reed is lead manager of the Templeton International Stock Fund and CEO of Franklin Templeton Investments Corp.