Rajesh Gandhi thinks investors focusing on growth overseas in this tepid global economy are on to something.
Gandhi, as portfolio manager at the American Century International Growth mutual fund, is watching investors put more of their money into foreign stocks and especially into the few sectors able to produce strong revenue growth, like health care.
The popularity of this relatively small number of foreign stocks is pushing their prices sharply higher. But Gandhi thinks these stocks, especially in Europe, are poised for more gains even though they’re looking expensive on several measures. He explains why below.
Q: Economic growth around the world is weak, and China’s getting a lot of the blame. How bad are things in China and around the world?
We are operating in a subpar growth world. Even in the U.S., even with all the stimulus we put through, we are producing 2-and-change percent growth. And the same thing is happening in Japan. The same thing is happening in Europe.
(China’s) government’s statistics indicate that it’s growing at about 7 percent. The reality is it’s growing at, we think, 3.5 or 4 percent. But 3.5 or 4 percent for an economy that was truly growing 7, 8, or even 10 percent before is still going to feel like a recession in many ways.
When we talk with companies today, their biggest fear is a continued slowdown in growth in China. It’s still being evidenced in their businesses.
Q: Given how weak growth is, it seems like the few companies that have delivered it have seen their share prices soar.
Earnings growth is increasingly scarce. So those businesses that are demonstrating growth and consistently delivering growth are getting bid up. Growth is narrowing, and growth investors keep moving into fewer and fewer names.
Q: Is there a corollary in the international markets for Facebook and Amazon, stocks that everyone seems to be piling into?
There isn’t so much a focus on specific, innovative companies. But, generally, the health care sector has directly benefited from a continued migration, and the price-earnings multiples have expanded. Now, we feel that’s justified, because growth is accelerating for a lot of the large pharmaceutical companies in Europe for the first time in a long time. Parts of the tech sector are benefiting from that. We don’t have an Amazon in Europe or Japan, but we have Amazon-like businesses.
Q: Is this subset of stocks now too risky? Is it time to sell high and walk away?
Given how we see the world playing out over the next 12 to 18 months, if I had to give advice to an investor, I think you still want to be in growth and growth-oriented strategies because growth is still going to be scarce next year.
Global growth is not accelerating and has more risk to it over the next 12 months than we had over the previous 12 months. Therefore, growth stocks are going to do reasonably well despite the valuations that are being accorded to them.
