Morgan Stanley Research examines the factors that are likely to determine future success for Australia’s leading globally-focused firms.
The track record of Australian companies expanding offshore over the last two decades was often mixed, with some significant success stories offset by some high-profile failures. Morgan Stanley Research examines the factors that are likely to determine future success for Australia’s leading globally-focused firms.
Morgan Stanley defines Global Growers as companies which source more than 40% of their revenues outside of Australia. This Global Grower cohort now represents 31% of Index weight – eclipsing traditional barbells in Financials (22%) and Resources (19%) as well as Domestic Industrials (28%).
Over the last five years, the expansion and extension of revenue streams into offshore markets has accelerated. Companies are now more often rewarded for global and regional ambitions, and investors appear more comfortable in assessing and extrapolating scale and scope opportunities outside of their home base.
Over the last decade, Australian companies have shrugged off bouts of poor strategic execution with respect to offshore expansion and consistently built larger revenue bases away from home. Today, the Global Grower cohort account for 31% of the ASX200. Sectors with dominant weights include Healthcare, Non-Bank Financials and Technology. Constituents trade on higher multiples with expectations to deliver above peer earnings per share growth. The track record of delivery has seen material outperformance of 227% relative to ASX200 over the last 10 years.
It's not a coincidence that Global Grower performance occurred during a multi-year retracement for the AUD – particularly versus the USD. Peaking at US$1.10 in 2011, the currency consistently fell, finding a cycle low during this year's crisis at 57c. The tailwind from average period translation enhanced growth perceptions – but did not create them. Now investor focus has turned to incremental strengthening of the AUD, creating a potential headwind but not a de-rating event, in Morgan Stanley’s view.
Morgan Stanley’s FX team sees the risks to the AUD as skewed to the upside, and in the context of a broadly weaker USD expect it to trade to 74c through 2021 (vs 71c spot). This translation impact will not be felt equally. Within the Global Grower universe, there are companies that have greater and lesser exposure to a stronger AUD and even some (typically importers) that stand to benefit.
Morgan Stanley recommends looking beyond AUD strength and concentrating the selection process to target opportunity around finding above-trend growth and high-quality fundamentals. Lower-growth, mature businesses will have less leeway should FX turn against reported profits. Therefore, Morgan Stanley recommends screening for a combination of above-trend earnings growth and strong free cash flow yield.
The fiscal pivot that has evolved in Australia and looms in key markets like the US keeps the rotational pulse tilting towards Cyclicality and a Value bias in positioning.
Global Growers represent 31% of the ASX200 and have consistently outperformed since 2013. Translation tailwinds are abating, but Morgan Stanley expects continued strong performance. A focus on growth and quality should increasingly factor into positioning and stock selection within the cohort.
For more Morgan Stanley Research on Australian stocks with attractive global growth prospects, speak to your Morgan Stanley financial adviser or representative. Plus, more Ideas from Morgan Stanley's thought leaders.