Expectations for earnings growth and return on invested capital (ROIC) have become more favorable outside the United States—and our outlook for growth in key industries suggests accelerating demand and emerging business models abroad.
An analysis of aggregate growth and returns outside versus inside the United States provides some insight into the performance differential we have seen over the past decade—and may provide some insight as to what may come.
Ten years ago, the growth outlook for U.S. and non-U.S. growth stocks was similar. However, U.S. companies were better positioned in terms of ROIC. The implication was that U.S. companies could enjoy higher returns for every dollar invested in their businesses. Over a short period, this return differential manifested in U.S. companies’ ability to make large investments in new technologies, acquire adjacent businesses, and enter new markets at a more rapid pace than their offshore brethren.
Positive Growth Forecast for Non-U.S. Companies
What we see now portends a similar such outlook for the growth of non-U.S. companies. Specifically, returns (as measured by ROIC) of non-U.S. companies are approximately 30% better than those of U.S. companies. In addition, the forecast growth of non-U.S. companies is faster, based on analyst estimates. This means that non-U.S. companies not only should benefit from greater compounding than U.S. companies, but the dollars available for investment should be greater as well—creating a strong cycle of sustainable value creation, as the chart below illustrates.
In particular, the outlook for growth in key industries is very attractive and, we believe, will result in accelerating demand and emerging business models abroad. IT services, digital payments, and renewables are examples of industries in which growing demand and the emergence of new business models drive a stronger growth outlook abroad.
IT Services/Enterprise Software
The concentration of IT inside the United States is high and has buoyed index returns. However, we are seeing an increased emergence of new technology applications outside the United States. The spread of at-home work could have significant investment implications, as our blog post explains.
Companies that may see an increase in demand include IT service providers that help other firms implement and scale remote-work platforms and firms that offer remote-work platforms with the features that enterprises want and need (such as security and file sharing).
IT spending in certain countries could also accelerate. Japan’s IT infrastructure, for instance, is still about 5 to 10 years behind that of the United States and Europe, so IT spending may be needed there to support remote work. We are paying close attention to how this innovation could play out globally, especially around telehealth and distance learning.
Payments
As we explain in a blog post, the digital payments industry represents a truly enormous addressable market that continues to expand due to strong, durable secular tailwinds. But the industry is also compelling because penetration varies significantly across regions and countries, creating opportunities for fundamental managers to find value.
For example, the United States is a more mature market with high penetration levels, while usage in Europe varies drastically by country. In emerging markets, penetration is typically low, providing a long runway for growth. Country-specific differences, shown below, provide insights into the nature of various opportunities around the world.
Renewables
A Bloomberg New Energy Finance study released in June 2019 projected that at present trends, the world will move from sourcing two-thirds of its energy from fossil fuels in 2018 to two-thirds zero-carbon energy by 2050, with wind and solar supplying nearly half of the world’s electricity by then. Coal-fired energy will fall by 51%, the study estimates, supplying just 12% of world electricity.
While the United States is a hive of renewable energy, it is no longer the world leader, as our blog posts explain. China is the top investor in clean energy today, while Europe leads in adopting renewable initiatives. Of the nearly $290 billion invested in renewable energy in 2018 worldwide, China accounted for most of it at $91 billion, according to a 2019 study published by REN21, a global renewable-energy think tank.
There are days in Germany when the cost of wind power is zero because of how efficient the wind farms have gotten and how much supply there is when it is windy. In the United Kingdom, there are even days when the country uses no coal-based power. The United Kingdom is also implementing policies whereby only electric vehicles will be allowed in certain parts of the nation.
As renewable energy has become more efficient and competitive, more and more companies—NextEra, Neste, Enel, and Orsted, to name a few—say they will continue to expand their renewable energy business because it is good for their bottom lines as well as the environment.
Up Next
In my next post, I’ll discuss why the regulatory environment outside the United States is more conducive to the proliferation of disruptive business models, which is a key factor in driving growth abroad.
Three Pillars of International Investing Series
Part 1: Three Pillars of International Investing
Part 2: Fishing In Bigger Ponds
Part 4: Disruptive Business Models Drive Growth Abroad
The MSCI All Country World Index (ACWI) Investable Market Index (IMI) captures large-, mid-, and small-cap representation across developed and emerging markets. The ex-U.S. variation of the index excludes the United States. The Russell 3000 Index measures the performance of the 3000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market. Index performance is provided for illustrative purposes only.
Alaina Anderson, CFA, partner, is a portfolio manager and research analyst on William Blair’s Global Equity team.
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