One of the most enjoyable aspects of managing money is researching which companies merit inclusion in client portfolios. To this end, we recently attended the 3M Investor Day in New York, where the company outlined its outlook for 2012.
Meeting with management provides the opportunity to assess both a company’s prospects, in terms of company-specific growth objectives, and the macro environment – global economic growth, regional disparities and so forth. In listening to 3M’s forecast, it was the latter we found to be of interest, as it very much coincides with our view of the global economy.
3M believes “we are likely seeing an economic reset” as countries – especially those in Europe – begin to address their bloated debt levels. We concur with this view. We believe government focus will be on paying down debt, resulting in austerity programs aimed at many social and welfare “sacred cows”, such as early retirement, short work weeks and the like. This will be a multi-year work-in-progress, resulting in tepid economic growth over the mid-term. While painful, it is necessary as it will provide a solid base for a longer term economic rebound.
Within this slow growth environment, variances will occur. Western Europe will lag, experiencing a mild recession over the next year or so, while China, Latin America and other emerging market countries will continue to expand at rates significantly above the global average. Japan, hit by the one-two punch of the tsunami and the crippling of its nuclear reactors, will continue to recover, although the recent flooding in Thailand will have a short-term negative effect on its technology sector. The United States will maintain its dogged recovery, while Canada will continue to benefit from growing emerging market demand for its wealth of natural resources.
This new economic reality does not mean we are bearish. Rather, we believe many companies will be able to flourish in this environment – it is only a matter of identifying them. We believe, as does 3M’s management, that companies that are highly cash generative, own powerful brands, have significant emerging market exposure and the ability to differentiate themselves and their products will be able to deliver impressive returns over the short, medium and long term. Major demographic trends such as the growing middle class in emerging market countries, the need for significant infrastructure spending globally and the aging population of Western Europe and North America all provide significant investment opportunities. While equity markets react with short-term volatility to each new piece of economic data, we remain comfortable with the financial strength and opportunities of the companies in which we invest.
We would like to wish you all a prosperous and happy 2012.