Over the last thirty to forty years, multi-national companies have dominated not only the American business landscape but that of the entire world.  If you go to “any town” USA, they all look similar with the same national restaurants and stores.  Multi-national companies have benefited from globalization, cheap capital and increased regulation over the last four decades.  Those trends may be changing.  Let’s take a look at them.

Globalization:  The economic fallout from the Great Recession is having an impact not only in the US, but around the world.  The average worker has not seen an uptick in their standard of living, and in many cases, they have seen it drop over the past decade.  One of the main reasons President Trump won the election was because of his “put America first” message.  Britain voted to leave the EU.  Politicians in France are now talking about a Frexit.  Globalization, at a minimum, has paused, but, in our opinion, may be starting to reverse course.

Cheap Capital:  Multi-national companies have been able to fund their expansion using cheap capital markets while smaller companies have had a much more difficult time accessing those same capital markets.  With interest rates beginning to rise, the cost of capital is becoming more expensive.  With the corporate tax reform President Trump’s administration is considering, there is some discussion that companies will NOT be able to deduct interest on borrowed money.  If interest rates continue to rise and this comes to fruition, the companies that will be most negatively impacted will be the companies with the largest amount of debt – multi-national firms.

Regulation:   There is a reason why both Goldman Sachs and JP Morgan want to keep the Dodd-Frank bill and its associated regulations – it helps their business.  Larger companies can more easily absorb the cost of increased regulations and may actually benefit from it.  Why?  There is less competition as smaller businesses fail due to increased costs of dealing with overwhelming regulations.  For example, since the enactment of Dodd-Frank, more than a quarter of community and regional banks have closed their doors.  These closures benefit the big banks like Goldman Sachs and JP Morgan.  One of President Trump’s goals is to reduce regulations.  If that occurs, smaller businesses will be better able to compete against multi-national companies.

What does this mean for your portfolio?

THOR follows a structured, disciplined investment approach based on fundamentals which we have never altered simply to “join the crowd”.  We currently have minor exposure to large, multi-national US companies because they are overvalued as measured by multiple valuation metrics.  What gives us conviction in this position is the aforementioned difficulty we see multi-national companies facing in a world that becomes de-globalized.  One should not invest based on macroeconomic projections.  However, it is nice when valuations and the macroeconomic environment match up.