UK growth is an international story, says Fidelity’s Ewing

As Tesco's plans to increase its footprint in China highlight the importance of international markets to UK companies, Tom Ewing, fund manager of Fidelity UK Growth fund, explains how UK investors are well placed to benefit too.

In its preliminary results last week, Tesco said it is seeing clear signs that its international markets are starting to recover and it is planning to resume a faster pace of new space opening in the coming year. In 2009/10 Tesco opened 5.1 million square feet of new space and in 2010/11 it plans to open 8.5 million square feet, in addition to nine shopping malls in China.

Ewing says there are a number of UK companies offering robust business models with the potential to benefit from future growth in emerging markets. He says: "The UK is a fantastically international market with two-thirds of revenues of the FTSE 100 coming from overseas.  I look for growth; not just growth in the UK market but all around the world."

Ewing says there are some questions he always asks when playing the emerging market theme in the UK:

Does the company offer goods or services that cannot be easily replicated?

"If you are a company that is doing something that can be replicated in emerging markets, you might have a problem in the medium to long term," says Ewing. "UK engineering and technology are in demand now but, longer term, competition will catch up. I need to look for companies with whom the Chinese will never be able to compete. London's mining sector is an obvious beneficiary of China's lack of natural resources.  For example, China has iron ore but it is very costly to produce. Of the three companies that control the seaborne market for iron ore, upon which China depends, two are listed in the UK."

Does the company offer goods that are desirable internationally?

"Among the various emerging markets' middle class there are many young people who aspire to consume what we consume in Europe and the US," says Ewing. "Fashion label Burberry and Diageo, maker of Johnnie Walker scotch, enjoy premium status among Chinese consumers. As middle class consumption continues to grow, driven in part by urbanisation, the demand for premium products creates opportunities for UK investors."

Is the UK market failing to appreciate the international potential for the company?

"There are examples of UK companies that are well established by the UK but have an international business angle that the markets are ignoring," says Ewing. "A good example of this is Mothercare which has done well in the financial crisis, emerging as the only high street baby shop in the UK.  However, there is another important aspect to Mothercare. Its fast growing global franchise which includes stores in India, the Middle East and China, has been underappreciated by the market. This creates an opportunity because the company trades at a similar valuation to its peers despite far more compelling medium term growth."

Is the company well positioned to benefit from economic growth in other markets?

"Companies such as Unilever and Reckitt Benckiser have been growing their international presence for years," says Ewing. "This means they are well placed to benefit from an acceleration of economic growth which is being experienced by a third of the world's population."

Does the company have sustainable, robust growth?

"We have been through a period where, from an investment point of view, it seemed like the world was coming to an end," says Ewing. "In 2009, when investors came to the realisation that an apocalypse had been averted, stocks that had been priced for bankruptcy took off. A lot of those stocks now look reasonably fair valued and so the question for investors is how do they achieve growth going forward? I look for companies that can grow in any environment and which can generate cash to reinvest in growth."