Amid the rapid technological and economic shifts of our hypercompetitive world, here's a surprise: The top multinationals remain amazingly stable. Eight of the 10 companies that head up BusinessWeek's Global 1200, a ranking of corporations worldwide by stock market value, are the same ones that made the top 10 last year. In fact, General Electric, (GE )ExxonMobil (XON ), and Microsoft (MSFT ), collectively worth $1 trillion, didn't budge from the top three spots. Health-care products maker Johnson & Johnson (J&J ) and consumer-products maker Procter & Gamble (PG ) moved into the top group, while financial services giant HSBC Holdings (HBC ) and drugmaker Pfizer (PFE ) dropped out. One big reason for such stability: Fund managers like to hang on to these "mega caps" to counter the volatility of their riskier stocks.
Drill down deeper into the list, though, and it becomes clear how tumultuous the world of global business really is. Pity the shareholders of Irish drugmaker Elan Corp., (ELN ) for example. The company plunged 462 places on the list, to 1,009, earning the dubious distinction of being the biggest loser. Elan shares plummeted 68% on one dark day in February after it pulled multiple sclerosis treatment Tysabri, a drug implicated in three deaths, from the U.S. market. That was only the latest setback for Elan, once the biggest company on the Irish stock exchange until an inquiry into its accounting practices brought the firm close to bankruptcy in 2002.
But for every harrowing descent, there is an exhilarating ascent. This year's top gainer was Australian real-estate developer Westfield Group (WDC ), which rose 458 places, to No. 285. Westfield has become a favorite of fund managers with its fast expanding network of shopping centers extending from Brisbane, Australia, to San Francisco. Close behind: France's Alstom (ALSGY ), which rose 419 places, to 751. Alstom, which got a $3.8 billion French government bailout in 2003 after it nearly collapsed, returned to profitability this year as it sold off assets, renegotiated debt, and took in more orders for power plants and railway equipment.
The Global 1200 amply confirms the idea that free-market capitalism is a constant process of creative destruction, with pain and gain -- but, in the end, a more prosperous world. In 2005, the total stock market value of the BusinessWeek Global 1200, a ranking of listed corporations in 29 countries compiled by Standard & Poor's rose 10%, to just under $24 trillion. Since this is a ranking of only companies in the S&P index, not all large companies are included. For example, Google Inc. (GOOG ), with a market value of nearly $128 billion, is left out since it is not part of S&P's Global 1200 index. Stocks are selected to reflect their market, based on criteria such as size, sector balance, liquidity, and financial viability. The companies ranked by S&P should see another healthy gain in 2006. Credit Suisse First Boston, for example, predicts a 7% return in world equity markets in 2006. Even after a strong 2005, figures CSFB strategist Andrew Garthwaite, stocks will remain cheap as growth accelerates modestly and inflation remains tame.
So what will be the mega-themes in 2006? If you answered "oil," congratulations. Still, profiting from continuing high petroleum prices is not the no-brainer it might seem. In 2005 the oil giants mostly rose. Royal Dutch Shell PLC moved up two places, a significant gain considering it was already in the top 10. Further down the list, Brazil's Petrobras (PBR ) rose 68 places, to No. 56, as its $72.3 billion market cap made it Latin America's most valuable company.
Next year the oil majors may not perform as well. Their costs for everything from steel pipes to labor are rising as the industry ramps up spending on exploration and refining. Meanwhile, oil prices are expected to remain fairly stable, with light Texas crude forecast to fetch $56 a barrel a year from now -- little changed from the 2005 average of $57. For that reason, the companies that provide services to the oil industry may be more interesting than the oil companies themselves. Several already did well in 2005. Schlumberger Ltd., (SLB ) which provides technology and services for oilfields, rose 39 places, to 90. "The easiest play is the oil service industry," says Klaus Kaldemorgen, head of equities at DWS, the Frankfurt-based fund-management arm of Deutsche Bank. (DB ) "The orders are coming, and coming in at much higher prices."
Maybe so. But the real buzzword among analysts for 2006 is broader: "resources." Surging demand for not just oil but also for commodities such as copper, iron ore, or platinum has propelled Anglo-Australian mining companies BHP Billiton (BHP ) (up 9 places, to 37) and Rio Tinto Group (RTP ) (up 36 places, to 84). There may be further upside for commodity stocks if, as CSFB calculates, the market is underestimating demand for raw materials by China and other fast-growing emerging markets.
The other mega-trend of 2006 is closely related to the first. Demand for all that energy and minerals is driven by the shift of manufacturing to China, India, Eastern Europe, and a host of other countries that have roared into prominence in recent years. That in turn is benefiting other emerging regions. In Latin America, one of the top gainers in the Global 1200 was Argentina's Tenaris (TS ), which supplies steel pipes for the oil industry and rose 322 places, to No. 478.
Emerging markets should be another smart play in 2006. CSFB sees global emerging markets posting returns of 11% in 2006, led by Brazil, Taiwan, Russia, and Korea. The question is how to profit from the growth. One way may be to look for the nexus of emerging markets and commodities, such as Brazilian iron ore producer Companhia Vale do Rio Doce, (RIO ) which climbed 68 places on this year's list, to 114, thanks to heavy demand from China. Or bet on China and oil at the same time via CNOOC, the Hong Kong oil company that is majority-owned by the Chinese government. It soared 164 slots, to 204, in the Global 1200. The company is well positioned to benefit from China's attempts to shift to oil and gas from coal.
For those put off by the political uncertainties of China, there are other ways to cash in on the country's growth, which is expected to continue in 2006 even though analysts disagree on whether it will be scorching or merely hot. One example is Japanese bulldozer maker Komatsu Ltd., which soared 302 places on the Global 1200, to No. 447, helped in part by soaring demand in China. Seriously in debt a few years ago, Komatsu became a growth story by moving beyond Japan and selling heavy equipment for mining companies and builders in Brazil, Russia, India, and South Africa, as well as China. These markets "have a lot more potential," says Komatsu CEO Masahiro Sakane. "I think they will be bigger than the U.S. by 2010." One way Komatsu protects itself from the risks inherent in developing markets: Bulldozers can be electronically disabled from afar if a customer falls behind on payments.
To be sure, investors haven't forgotten about the U.S. and the wealthy countries of Europe. American companies still account for more than half of our list's top 50, and European or Japanese companies account for most of the rest. But there are clear signs of a shift in the global balance of corporate power. South Korea's Samsung Electronics Co. rose 16 places, to 32, becoming the most valuable Asian company outside Japan. (TM )Samsung's spending on research and development this year is expected to top $5.2 billion -- as a percentage of sales, that's more than such research powerhouses as IBM (IBM ), Motorola, (MOT ) Sony (SNE ), and Canon. (CAJ ) "Anybody can make consumer products," says CEO Yun Jong-Yong. "The difference will come from controlling core technologies for parts, marketing, and improving brand image."
Meanwhile, plenty of once-mighty companies have stumbled badly. General Motors Corp. (GM ) plunged 270 places, to 506, while Ford Motor Co. (F ) dropped 215 places, to 406. And woe to any company that adapts too slowly to a change in technology. Japanese copier and camera maker Konica Minolta Holdings Inc. fell 198 places, to 946, after it took too long to shift to digital cameras. In November the company announced plans to take a hit of $750 million to shutter factories, write off assets, and lay off part of its workforce. That will mean a net loss this year of $390 million -- twice the amount the company had previously forecast.
The big land-line telcos are also losing appeal. Decliners included Australia's Telstra, Verizon Communications Inc. (VZ ) of the U.S. and Europe's ex-monopolies, Telecom Italia (TI ), France Telecom (FTE ), Deutsche Telekom (DT ), and Spain's Telefónica (TEF ). The message: traditional land-line voice service is going the way of the dinosaur. Most of the telcos that moved up in our ranking are mobile operators such as Britain's O2 and América Móvil (AMX ) -- the mobile telephone giant controlled by Mexican billionaire Carlos Slim rose 91 places, to 152. One-third of the company's 83.6 million Latin American clients are in Mexico, where low interest rates and fast-expanding consumer credit have fueled demand for cellular phones and other electronic gadgets. Meanwhile, China Mobile Ltd. (CHL ), the top Chinese company on the list, moved up 24 places, to 36, with a market cap of $97 billion.
Can shoppers keep spending on cell phones and other consumer goodies? Investors aren't sure -- which is why any company that depends primarily on consumer spending in a mature market is regarded warily by the markets. That's especially true going into 2006, as the U.S. housing market cools. "Everybody tied to the low-end consumer is under pressure," says Christian Schneider, a fund manager at Deutscher Investment Trust, the asset management arm of Germany's Allianz Group. Britain has already delivered a foretaste of what can happen to consumer spending when a housing boom ends. Do-it-yourself retailer Kingfisher PLC plunged 241 places on the Global 1200, to 675. "It was a tough retail environment," says Colin Pratt, investment analyst at Morley Fund Management in London. Investors fear U.S. consumer spending could also cool. Indeed, Wal-Mart Stores Inc. (WMT ), the world's biggest retailer, slipped one spot in the rankings, to No. 7. Even the world's giants companies can't rest easy.
By Jack Ewing, with bureau reports