Taxes As Motivation
It’s tempting to think that tax abatement—as is being suggested in the Burger King-Hortons deal—is a driving force behind the internationalization of indexes like the S&P. But I don’t think it’s as big a driver as many think. Logic has it that higher foreign sales and earnings lead to higher foreign taxes. Not so quick.
Foreign sales may have increased in 2012 from 2011, but the shift in regional contributions changed the foreign tax paid. Asian sales continued to grow, while European sales continued to decline.
That shift resulted in S&P 500 multinationals sending more—not less—to Washington in 2012 than they sent abroad. They sent 51.2 percent to Washington in 2012 compared with 45.3 percent in 2011. This is a reversal because as recently as 2010, U.S. corporations were paying about $16 billion more in foreign tax than they were in U.S. income tax.
EM Access Via Multinationals
Accessing emerging market exposure through developed-market multinational companies is becoming an increasingly popular line of research for those looking to take a more directed approach to this idea. Indeed, a select group of developed-market companies have a heightened exposure to emerging market revenues.
Emerging markets accounted for 38 percent of total global gross domestic product in 2012 and 76 cents of every dollar in global GDP growth in 2011, according to data compiled by both the International Monetary Fund and BofA Merrill Lynch Global Research, 2011.
And though S&P 500 companies derived 46 percent of their total sales from foreign markets, only 14 percent came from emerging markets, according to data from S&P Dow Jones Indices data and BofA Merrill Lynch.
Appropriately enough, there’s even an index that targets the emerging markets explicitly through firms based in the developed world. That’s the EGAI Developed Markets Blue Chip EM Access Index. It’s an equally weighted index that includes a sector diversification screen for the 44 stocks from which the top 30 stocks are ranked by percentage of emerging market revenue.
There’s now an ETF on the market that was built around this index, the EGShares Blue Chip ETF (BCHP). So, to the list of well-traveled ETFs such as SPY, MDY and IJR that offer investors varying amounts of foreign exposure through companies based in the developed world, we can add BCHP as a newer way to mine this underappreciated method of obtaining foreign exposure.
At the time this article was published, Cougar owned shares of SPY, MDY and IJR on behalf of clients.
Cougar Global Investments, founded by Dr. James Breech, is a Toronto-based global tactical ETF portfolio strategist that uses only ETFs in its top-down global asset allocating strategies. Breech launched Cougar in 1993 around a downside risk management system he created. Contact Cougar Global at 800-387-3779 or [email protected].
Deborah Frame is vice president of Investments and chief compliance officer at Cougar. She heads up the research team there, including macroeconomic, market environment and asset class correlation research used in the firm’s qualitative and quantitative asset allocation models that focus on downside risk optimization and the use of ETFs.