Three top-quality global stocks that will stand the test of time

Professional investor Tom Wildgoose of the Nomura Global High Conviction Fund picks three stocks from overseas markets that should stand UK investors in good stead.

When it comes to investing, sticking with what we know makes sense, especially in uncertain times (which seem to be all the time). As I am British, UK stocks seem familiar to me. The largest is AstraZeneca – everyone knows AstraZeneca. The second-biggest is HSBC, followed by GlaxoSmithKline. These are companies we can feel comfortable with, you might think; no need to look further. 

In its 2018 European Asset Allocation Survey of institutional investors, Mercer, the investment consultant, found that UK investors keep 28% of their equity allocation in British markets (compared with the UK’s 4% weighting in global equity indices) and it’s the same for Europeans generally, with a 38% allocation to home equity markets.

A global footprint

AstraZeneca’s US revenue is 80% higher than its European revenue. Almost 50% of HSBC’s revenue comes from Asia, and it’s a similar story at GlaxoSmithKline. So we are more familiar with international markets than we thought. 

The problem is that the FTSE 100 is skewed away from highly profitable, or “quality” companies. The largest ten companies in the UK market have an average expected “post-Covid-19” return on equity (ROE, a key gauge of profitability) of 23%. The largest ten in the MSCI World Index, a broader global index, have an average expected post-Covid-19 ROE of 38%. 

Over the last decade the MSCI World Quality Index has outperformed MSCI World by almost 90% and the FTSE 100 by almost 195%. For the ten years before that, MSCI World Quality beat MSCI World by 14%, but in the decade before that the gap was 309%. So buying “quality” works, but buying British doesn’t seem to be a “quality” buy. 

The companies on the UK market are not generally of the quality that can generate good long-term investment returns. Unilever is listed in London and is a very good company, but how about looking at a company like Mastercard, which we are all familiar with? 

“Quality” does not simply mean “growth”. Many of the top-performing funds over the last few years have focused on rapidly-growing companies but the inverse correlation of “growth” stocks’ returns with bond yields is clear. Should inflation come back, bond yields are likely to rise, reflecting falling bond prices. “Quality” has stood the test of time whereas “growth” is likely to suffer if bond yields rise (higher interest rates temper growth).

Three top tips 

Here are three global stocks that we think are “quality”, but not necessarily “growth”. One is Inditex (Madrid: ITX). This is the Spanish company behind Zara. Naturally the pandemic has affected sales, but it has a strong balance sheet and a growing online business. 

Then there is Novo Nordisk (Copenhagen: NOVO-B), a Danish diabetes-treatment maker with a terrific record on environmental, social and governance issues and a head-start on the competition in oral-diabetes treatments. Finally, Pepsico (Nasdaq: PEP) is a high-quality soft-drinks, snacks and foods maker whose brands include Quaker Oats and Pepsi Cola. Its ROE and history of dividend payments are both attractive.

Recommended

Chase Coleman: star hedgie hits the panic button
People

Chase Coleman: star hedgie hits the panic button

Chase Coleman got off to a sizzling start in the hedge-fund industry and became one of the biggest winners of the tech bull market. His fall from grac…
28 May 2022
How the West can win Putin’s war on food
Global Economy

How the West can win Putin’s war on food

The West could easily make up the shortfall if it let the free market rip, says Matthew Lynn.
28 May 2022
Which companies will lose the most from the energy windfall tax?
Energy stocks

Which companies will lose the most from the energy windfall tax?

The government’s new energy windfall tax has muddied the waters for investors and companies alike. Rupert Hargreaves explains how it might affect some…
27 May 2022
The MoneyWeek Podcast with Russell Napier at the Library of Mistakes
Investment strategy

The MoneyWeek Podcast with Russell Napier at the Library of Mistakes

Merryn talks to Russell Napier about Edinburgh’s Library of Mistakes, the age of debt and financial repression, plus why he has never invested in Chin…
27 May 2022

Most Popular

Scottish Mortgage Investment Trust has fallen hard. But is now the time to buy?
Investment trusts

Scottish Mortgage Investment Trust has fallen hard. But is now the time to buy?

After a spectacular couple of decades, the Scottish Mortgage Investment Trust has fallen by almost 45% so far this year. Rupert Hargreaves asks if no…
26 May 2022
The world’s hottest housing markets are faltering – is the UK next?
House prices

The world’s hottest housing markets are faltering – is the UK next?

As interest rates rise, house prices in the world’s most overpriced markets are starting to fall. The UK’s turn will come, says John Stepek. But will …
23 May 2022
Is it time to pick up growth stock bargains yet?
Investment strategy

Is it time to pick up growth stock bargains yet?

If you’re thinking of picking up some bargains from the tech stock crash, beware – there are still plenty of “growth traps” out there. John Stepek exp…
26 May 2022