I recently had a discussion with a client that had just returned from a European vacation. He shared stories about the interesting food, culture, and architecture. But he also offered a warning…
“The economy in Europe is dead.” He pointed out the window of our Calgary office at a busy construction site across the street. “Look at all these cranes! Calgary is a booming city. I didn’t see any of that during my vacation. So wouldn’t it make sense to pull our money out of Europe and invest more in Canada?”
This logic is rooted in a common misconception – that the economic health of a particular country or region is directly correlated to its future investment success. More cranes must mean more money, right? We sometimes even refer to “Europe” or “Canada” as if they are investable entities, when in reality it is their underlying companies that make up an investable universe.
As I gathered my thoughts to address his suggestion, we looked down at the construction site below. The labourers were most likely local engineers and construction personnel. The land developer was local. And the project will likely enhance the tax base for various levels of Canadian government. But we noticed some interesting logos on the various pieces of machinery and equipment on this worksite:
John Deere (U.S.)
Calgary’s construction “boom” may be helping local businesses, but global companies are reaping the rewards as well. This busy worksite serves as a visual reminder that where a company is headquartered does not limit where it can derive revenue. Many of the European companies we own are also global in scale, and not hindered by borders. Granted, a slowdown in the Eurozone is certainly a headwind for these businesses, but it may not be as dire as it appears to be.
For example, should we sell a company like Unilever, which generates approximately 73% of its revenue outside of Europe, because of a slowdown in the Eurozone? I suspect consumers in India, Brazil, Indonesia, and the U.S. don’t buy less shampoo and laundry detergent because of economic woes in Europe.
Does the lack of construction activity on the Paris skyline have a material impact on Louis Vuitton when approximately 70% of the company’s revenue comes from luxury shoppers outside of the continent?
Rolls Royce, BMW, and pharmaceutical giants like Roche and Novartis are additional examples of businesses that we own that are categorized as European, but generate the majority of their revenue outside of Europe. Selling these businesses simply because of where they are headquartered, without fully understanding all the factors that determine their long-term success, seems like a simplistic, knee-jerk reaction.
In fact, if more and more investors reach the conclusion to “sell Europe” due to near-term economic challenges in the Eurozone, it may create exciting opportunities for long-term investors–particularly those that identify companies that are being unduly punished due to their postal code rather than a material deterioration in their global operations.
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