Britain's Rather Good ShowRichard A. Melcher
Studying the British economy can be a grim exercise. Locked in the longest recession since World War II, Britain is struggling. The jobless rolls have risen by 1 million people, while corporate bankruptcies are hitting record levels. Consumer confidence is faltering. And one of the nation's biggest industrial companies, British Petroleum PLC--buffeted by huge debts and internal dissension--sacked its chairman, Robert B. Horton, in late June.
But there's some good news behind the gloom. Despite the country's troubles, a growing number of British-based companies are becoming world class, selling products as diverse as the antiulcer drug Zantac and Johnnie Walker Scotch whisky. Results of BUSINESS WEEK's fifth annual Global 1000, which ranks the world's largest companies by market capitalization, reveal solid, sometimes spectacular, gains by British companies. Led by big jumps in value at drugmaker Glaxo, drinks producer Guinness, and consumer-products giant Grand Met, Britain added 16 companies to this year's Top 1000, second only to the U.S., which added 24. Overall, Britain added $162 billion to its total market capitalization, up 26% over the year before.
`BUY THE WORLD.' The strong British showing underscores a major theme running through much of the list: In a period of slow growth across much of Europe and Japan and only a modest pickup in the U.S., investors turned to recession-resistant companies with solid brand names and a broad spread of international activities. What's more, investors favored companies that have taken big restructuring hits or digested big acquisitions--or both--and now are emerging as industry leaders. Many such seasoned operations are found in Britain. Says Eric Elstob, joint managing director of Foreign & Colonial Investment Trust PLC: "If there is one place to buy the world economy, it's in London."
The Global 1000, compiled by Geneva-based Morgan Stanley Capital International, tracks 2,500 companies in 22 countries in developed markets. The publicly traded companies are ranked on a worldwide basis, using market value and other data as of May 29. A country-by-country listing follows, putting market performance in a national context. The list also incorporates data on U.S. companies from Standard & Poor's Compustat Services Inc. To cast the net as wide as possible, BUSINESS WEEK adds a separate table ranking top companies in South Korea, Taiwan, Brazil, and Mexico by sales and profits. These four countries have global-scale companies, but their markets are either difficult for foreigners to enter or aren't tracked by Morgan Stanley.
After Britain's noteworthy gains, the next big trend was Japan's slide. Mammoth Nippon Telegraph & Telephone Corp. suffered a $25 billion drop in its market value. Indeed, the 29% drop in the Nikkei stock average in the period measured sent Japanese companies down the rungs of the Global 1000. Four fell out of the Top 10, and 44 of the biggest 50 decliners in market value were Japanese. Japan's banks have been clobbered by real estate loan problems and steep falls in their equity portfolios. Japan's only conspicuous gainer: Toyota Motor Corp., flush with $13.5 billion in cash and liquid investments, boasts a dominant market share at home and a rising one in the U.S. As a result, Toyota jumped to No. 11.
HAVENS. There's no question that the "bubble years" in Japan are over and that a shakeout is now under way across a wide swath of industries. Only a few of Japan's Global 1000 companies have been left untouched. Yet, mindful of the $3.5 trillion spent by Japanese companies during the late 1980s on research and development and plant and equipment, economic analyst and author Naoki Tanaka argues that "the market crash has had hardly any impact on the competitiveness of Japanese companies."
Competitiveness aside, American companies outdid the rest of the world in this year's list, grabbing the lion's share of total market value. Well-run old reliables that weathered the U.S. recession, such as Exxon, Philip Morris, and General Electric, solidified their claims on the Top 10. And new entrants to the lofty ranks, such as Coca-Cola Co. at No. 7, reflect investor appetite for proven global leaders in consumer products. Another clear beneficiary of safe-haven investing: Wal-Mart Stores Inc. In a bombed-out retail sector, this discounter par excellence continued its climb and now ranks an eye-popping No. 6 among all companies, worth $61 billion.
Britain's market success in this period holds some sober lessons for its economy as a whole. By and large, the winners are consumer and drug companies that have spent heavily developing and nurturing brands sold around the world. At the same time, the Global 1000 shows the waning importance of manufacturing in the British economy. True, conglomerates Hanson, BTR, and Imperial Chemical Industries are industrial powerhouses. But the big industrials, along with consumer-product companies, are increasingly putting their assets overseas--not at home.
A HEYDAY? That's a worrying long-term trend for the domestic British economy. David C. Roche, chief global strategist at Morgan Stanley International, expects the next few years to be a heyday for capital-goods and other manufacturing companies in most economies. But "in the back-to-basics shift," he says, "Britain will lag behind."
The shakeup at BP is a stark example of weakness behind the year's gains. Consider its fortunes contrasted with archrival Royal Dutch/Shell Group. Although slow growth around the world has taken its toll on the Anglo-Dutch company, its resilience and impeccable balance sheet have won over investors. So much so, in fact, that it edged out Japan's giant NTT to take the No. 1 spot in the Global 1000.
On the Continent, dozens of big European companies are proving their mettle during tough times by driving down costs and successfully absorbing competitors. Although Germany has relatively few big, publicly held companies, they are formidable players. Allianz Holding, now Europe's largest insurer, shook off investor worries about its acquisition binge a year ago and has jumped to No. 30 on the Global 1000, just as a downturn in the insurance cycle seems to be taking hold. Daimler Benz, which is in some ways a proxy for Germany Inc., is confident that its earnings are firmly on the upswing as German growth picks up. Even so, 39th-ranked Daimler, with a market capitalization of $23.5 billion, is ruthlessly slashing costs and dumping businesses that can't become world players.
SPANISH PLEDGE. The relatively healthy, low-inflation French economy provided a fillip to powerful supermarket discounter Carrefour. Although Carrefour has had difficulties in the U.S., the company consolidated its leadership in French food retailing with the $950 million purchase last year of Euromarche. Investors are also spotting a turnaround story at the world's largest tiremaker, Michelin. After $900 million in restructuring costs over the past two years, Michelin rejoined the Global 1000 after falling off the list last year.
Spanish Prime Minister Felipe Gonzalez' firm signal that he has joined Europe's free-market enthusiasts is invigorating industry in Spain, from electric utilities to banks. Tight fiscal and monetary discipline is helping to bolster investor confidence and lift a growing number of Spanish companies into the Global 1000. Pryca, a retailer partially spun off by Carrefour, made the list this year. And a move to cleaner sources of energy supply and freer prices have benefited such Spanish companies as Endesa, the largest electric company, and newly merged electric utility Iberdrola.
In contrast to Spain's vitality, Italy is is in deep decline, stuck in political gridlock and plagued by swelling budget deficits. Its sagging economy is dragging down blue chips. Auto maker Fiat has lost a huge chunk of market share, down from 54% to 44%, over the past two years, and lost 6% of its market value this year, down to $9.35 billion. Although Milan's Montedison still enjoys rich earnings in agroindustry, its $5.7 billion in debt makes it difficult for the company to rebound from a deep slump in chemicals. It lost ground on this year's list, as well. Overall, Italian companies have been slow to establish themselves in Europe.
BOOMING. No such stay-at-homes plague Hong Kong, where worries about the handing over of power to China have been set aside. The Hang Seng index is up a blistering 56% this year, highest of any major market. Booming real estate values, tied to the demand for housing by newly affluent young families, have pushed Wharf Holdings, Henderson Land, and Hong Kong Land high up the ranks of the Global 1000. Then there's the frantic trade with China's Guangdong Province, which is lifting the big trading houses, Jardine Matheson and Swire Pacific Ltd. These old-style British trading companies are benefiting greatly from the blurring of boundaries between southern China, Hong Kong, and even Taiwan.
This border-leaping ability is one key characteristic of most of this year's Global 1000 gainers. Another is strong brand names, whether Coca-Cola, Toyota, or Smirnoff. These kinds of companies can ride out currency swings and stock market fluctuations. They also can eke out profit gains in slow-growth economies because of their brand names and strong core areas. At the same time, they are big enough and savvy enough to tap into emerging markets in faraway lands. Across the globe, it's clear that formula works through bad times as well as good.
MARKET GUIDE FOR INVESTORS National composites of Global 1000 stocks Market capitalization P-E ratio Yield Return on Billions of U.S. dollars equity 1. U.S. $2,869.3 25 2.7 % 16.7% 2. JAPAN 1,675.5 49 1.0 7.3 3. BRITAIN 777.2 29 4.8 17.7 4. GERMANY 269.6 23 1.7 12.8 5. FRANCE 254.3 19 3.0 12.9 6. SWITZERLAND 118.5 17 2.3 11.9 7. HONG KONG 117.8 18 3.2 17.5 8. NETHERLANDS 114.5 13 3.8 35.0 9. CANADA 110.3 46 3.4 9.5 10. AUSTRALIA 90.8 18 3.5 10.3 DATA: MORGAN STANLEY CAPITAL INTERNATIONAL INC., BWEUROPE'S BIG GAINERS: BRITAIN LEADS THE WAY Company Country 1992 market Increase in value market value from 1991 (billions) (billions) 1. GLAXO HOLDINGS Britain $ 42.6 $12.6 2. WELLCOME Britain 15.3 6.9 3. GUINNESS Britain 21.4 6.6 4. GRAND METROPOLITAN Britain 19.3 6.2 5. BTR Britain 17.2 5.7 6. ROCHE HOLDING Switzerland 20.8 5.6 7. MARKS & SPENCER Britain 17.0 5.4 8. J.SAINSBURY Britain 15.2 5.1 9. TOTAL FRANCAISE PETROLES France 9.2 4.3 10. CIBA-GEIGY Switzerland 14.2 4.3 11. L'OREAL France 9.9 4.2 12. SMITHKLINE BEECHAM Britain 21.2 4.1 13. B.A.T.INDUSTRIES Britain 21.9 4.1 14. ENDESA Spain 9.5 3.9 15. ALCATEL ALSTHOM France 14.8 3.7 16. SIEMENS Germany 23.1 3.5 17. BSN France 11.9 3.3 18. ELF AQUITAINE France 18.9 3.3 19. REUTERS HOLDINGS Britain 9.5 3.2 20. RHONE-POULENC France 6.6 3.2 DATA: MORGAN STANLEY CAPITAL INTERNATIONAL INC.