Proponents of diversification extol the virtues of spreading your investments over different assets, sectors, and geography. The last part in this holy trinity – geography – is particularly captivating to a growing cadre of investors.
That's an understandable impulse, since the opportunities always seem greater, and the terrain more fertile, over the horizon. Whether you're talking about China, Brazil, India, the market's conventional wisdom holds that if you're not turning a buck in these exotic lands, you're a provincial rube who's mistakenly forgone the gravy train. Unfortunately for conventional wisdom, it isn't always right.
What's so great about "over there"?
Most of us have never been to China, Brazil, or India, so we go by the admittedly impressive official stats. China's GDP more than doubled from 2000 through 2009, rising from $1.2 trillion to $4.3 trillion. India's GDP nearly tripled over the same period, from $1.2 trillion in 2009 from $460 billion in 2000. Meanwhile, Brazil's GDP swelled to $1.6 trillion from $644 billion. The United States? It only grew by roughly half, posting GDP of $14.2 trillion in 2009, compared to $9.8 trillion in 2000.
You could plausibly argue that better opportunities await abroad, and for many firms they do. Cola-Cola has excelled in exploiting faster-growing markets; nearly all of its current growth owes primarily to its presence in Asia, Africa, and Latin America. Its North American market is actually shrinking. What's more, Coke's margins are significantly wider in each of these foreign markets than for North America.
McDonald's (NYSE: MCD) initially seems similar. Like Coca-Cola, it generates the majority of its revenue outside the United States. In 2009, the U.S. market accounted for a little more than a third of Mickey D's $22.7 billion of revenue; Europe accounted for a little less than half, while Asia/Pacific, Middle East, and Africa (APMEA) contributions accounted for about a fifth. McDonald's U.S. and European operations have stagnated. APMEA has offered the lion's share of growth in recent years, increasing about 20% over the past two years.
But an iconic brand doesn't guarantee greater efficiency abroad. In McDonald's case, each domestic dollar of revenue generates $0.40 in operating income. In Europe, it generates $0.28. In APMEA, each dollar of revenue generates about $0.23 in operating income. Being over there might be better for revenue, but the income's better over here.
The international market is the new growth engine for mighty Wal-Mart (NYSE: WMT), even though it stalled in fiscal 2010. International sales increased 1.3% to $100.1 billion, after rising 9.1% in 2009. Like McDonald's, though, Wal-Mart gets more bang for its buck in the United States. Each dollar of domestic Wal-Mart U.S. sales produces $0.07 in operating income, compared to $0.05 internationally.
Greater reward, greater risk
Emerging markets' undeniable rewards also come with additional risks, including currency fluctuations and political interference. The former factor cut $540 million from Wal-Mart's reported international operating income for the year ended Jan. 31, 2010. (That said, shifting exchange rates aren't always bad; Wal-Mart's operating income for the fourth quarter gained $122 million from currency exchange rate benefits.)
Political risk is a far greater concern. Microsoft has been battling the European Commission for the past few years, sustaining a $1.4 billion fine in 2008 for failing to comply with a March 2004 antitrust decision. More recently, Google has embroiled itself in a dicey dust-up with China's government over the nation's censorship policies. As a result, Google could withdraw entirely from a country with 1.3 billion inhabitants.
If politics and foreign currency exposure aren't your thing, or you're leery of secondhand accounts of foreign riches, you can stay here and still get growth -- not just in newbie start-ups, but with brand names. Check out the five-year average sales growth rates of these companies with mostly domestic businesses:
- Kohl's (NYSE: KSS): 8%
- Southwest Airlines (NYSE: LUV): 9.6%
- Republic Services (NYSE: RSG): 24.8%
- Wellpoint (NYSE: WLP): 24.2%
- Strayer Education (Nasdaq: STRA): 22.8%
There's nothing inherently wrong with seeking opportunities in foreign lands through U.S. companies that operate abroad. But those companies aren't inherently better than businesses that focus on domestic opportunities. You don't have to invest in emerging markets just to follow the crowd -- something investors concentrating mostly on China, India, and/or Brazil should keep in mind.
