Most investors look on today's mega-cap multinationals as giant super tankers, navigating the choppy global waters, slow moving but solid, reliable and producing lots of cash. But this view misses an essential truth: that the companies topping the list of the world’s biggest multinationals are constantly changing. Examine the constituents of the legendary Dow Jones Industrial Average of top 30 companies in the US. Back in 1990 that list of 30 comprised 12 companies that were no longer even on the list 20 years later.
If we're on the lookout for tomorrow's global giants the obvious place to start is the emerging world – mammoth new companies are rising in places like Brazil, China and Russia, many with valuations in the hundreds of billions of dollars. But the valuations placed on these fast-growing companies is not always extravagant – single-digit PE ratios based on 2010 estimates are not unusual, especially in Russia and China where investors worry about political risk. An even stranger sight is that of Chinese mega-caps such as PetroChina paying a decent dividend yield, backed by plentiful free cash flows.
But these giants of today – destined to be even bigger giants of tomorrow – are not without risk.
In many cases – the Indian companies tend to be an honourable exception – the risk of political interference and manipulation is ever present. The most obvious example is in Russia, where bargain-basement ratings are attached to the big oil companies, Gazprom and Lukoil, but those lowly prices are testament to concerns among western investors that everything is not what it seems – that the company's real masters are in the Kremlin where concern for outside investors ranks low down the list. In the case of both oil companies it's also worth noting that these profitable companies pay nothing (or next to nothing) in dividends to their shareholders.
But this concern about political risk extends way beyond the obvious candidates of Russia and China – the new President of Brazil Dilma Roussef is from the left wing of the ruling Workers Party and is likely to increase pressure on key Brazilian conglomerates such as Petrobras to invest more in Brazil.
A concern that has abated in recent years has been accessibility and liquidity. Traditionally these large, EM based companies have been difficult for Western investors to buy into, but a recent slew of American ADRs and British GDRs has made buying these foreign shares remarkably easy. If you're willing to use these secondary market listings in London and New York, you could now easily assemble a list of tomorrow's global mega-caps – there's even a fund structured as an ETF that focuses exclusively on the very biggest companies in the BRIC space.
