2011: A year for global companies that make things

London (Reuters): If no major sovereign or national budget is truly safe anymore but the private sector is revving up again on a developing world engine, then 2011 may simply be a year for investing in big global companies that make things.

As a new year drifts into view, it is tempting to assume the final throes of the three-year-old credit crisis may at last be playing out.

But what started in 2007 as a disease in dodgy mortgage credit, then infected world banks and eventually their reluctant sovereign rescuers, is still claiming national victims and there may yet be a thumping finale.

More months of anxiety

What’s for sure is there are several more months of anxiety over the sustainability of sovereign debts – whether in Europe, Japan or even the United States. And even if that eases, the impact of the reflation policies needed to resolve the problem – especially if successful – are hardly bond friendly.

But just peep over the top of government funding worries for a moment and there’s a growing conviction that world growth will be pretty buoyant next year – thanks to the persistence of those very monetary supports, vast stores of corporate cash and historically punchy activity in many emerging economies.

If the news headlines are filling you with the dread of creditors deserting countries, multilateral bailouts, swinging austerity and job threats, that’s not the complete story.

Look at the most-used seismograph of world financial markets, Wall St’s Vix index of equity market volatility and uncertainty. It’s trading at an eight-month low and within a whisker of pre-crisis 2007 levels.

So why the parallel universes?

With fourth-quarter U.S. earnings growth expected to be in excess of 30 per cent and world economic growth forecasts topping 4.0 per cent for 2011 – more than half a point above the average world growth rate of the past 20 years – it’s not hard to see where the optimism is coming from.

At the very least, it should prompt a rethink of safety trades, near-zero cash returns and depressed AAA bond yields.

Emerging tilt

The important bit is that the lion’s share of global growth remains in the emerging world, where International Monetary Fund forecasts of 6.4 per cent for next year are almost three times those for the developed economies – even if growth projections in the likes of Germany and United States are also creeping up of late.

Yet the investor dash to emerging markets has already turned to a flood – annual flows to emerging equity funds already topped records at more than $84 billion in mid November – and there are gnawing jitters about crowded trades, nascent bubbles and random capital controls.

So for many, the best place to be is simple: big, Western-listed multinationals who promise government-busting earnings and dividend yields and offer plenty of exposure to the booming emerging economies.

“I really don’t feel a compelling reason to go overseas to invest,” New York money manager Martin Sass, who forecast a 20 per cent rise in 2011 for S&P 500, told Reuters Investment Summit last week.

Sass is not alone in seeking developed market stock plays to leverage off emerging economic growth.

“We’re trying to get exposure to emerging markets through investments in developed markets,” said Giordano Lombardo, Milan-based chief investment officer of the $250 billion Pioneer Investments.

“We tend to, for example, focus on the German car producers which now have China as their biggest market.”

Lombardo talked of other companies like U.S. firm United Technologies and British banking giant HSBC that were interesting precisely because of their exposure to rapidly growing Asian economies.

Swiss wealth manager Sarasin has been a long-term advocate of what it calls the “nifty-fifty” top cash-rich global stocks with diverse earnings across emerging markets. This grouping includes the likes of Swiss drugmakers Novartis and Roche as well as U.S. technology bellwethers Intel and Cisco.

Western luxury goods

And for those betting on emerging millionaires, Western luxury goods firms might be the best Christmas present available.

“China needs to stimulate domestic consumption to ease its trade balance,” Distinction Asset Management told clients last week. “Luxury goods will continue to receive a tailwind because of this. Companies such as Tiffany, LVMH, Coca-Cola, and Brasil Foods will benefit from the new affluent and emerging middle class.”