So global stock markets continue to fall. A month ago, in mypiece Ive been waiting 16 years to write this article, I predicted the gradual start of a new bull market. But I was too quick off the mark.I think we have to wait for the final embers of the current bear market to burn themselves out. And that could take until the end of this year.
Yet I reiterate my view that this a great time to buy shares, particularly emerging market shares, as share prices are as cheap as they will ever be. You dont buy when optimism abounds and everyone is piling-in. You buy when theres panic, when theres bloodon the streets. As they say, fortunes are made in bear markets. You just dont know it at the time.
Only invest in companies that make money
But then youre faced with the question, whatshould you buy? Investingmay seemeasy, but it isnt. Just what makes a company a good investment?
People talk about debt, growth, turnover. But theres one thing you should consider above all else when you research a company:Earnings.
Post-Credit Crunch, the world has changed. If New York was once the centre of the world, now its Shanghai. A world thatwasnt producing enough, that constantly went through bouts of inflation, has turned into a world that produces too much, and is headed towards deflation. Near-zero interest rates andinfinite QE once seemed implausible. Now theyre a fact of life.
This means the environment companieswork in has changed from night to day. Competition is more global (and more fierce) than ever before. In the 1980s, when you talked about supermarket retailers in this country, the main ones were Sainsbury, Tesco and Asda. Now we have Sainsbury, Tesco, Asda, Morrisons, Waitrose, Marks & Spencer, Aldi and Lidl.
And these are becoming harder to find
Record shopslike HMV and Virgin didnt have to worry aboutAmazon and a thousand other internet retailers. With high interest rates, the high street banks such as Barclays and Nat West made billions of pounds of profits each year. Now the legacy of the Great Recession, including bad debts, fines and banker-bashing, means that banks find it difficult to turn a profit at all. And a surfeit of supply in commodities mean that firms like BP and Rio Tinto are seeing their income slide too.
Companypricing power, and margins, are being crunched. Meanwhile, the powerhouses of China and India are just starting to pick up steam. ChemChinas recent bid for Syngenta, one of Europes most impressive chemicals companies, is a sign of things to come.
So what can investors do? Just follow the profits. And there are a lot of profits to follow. The worlds pool of consumers is far greater than ever. That means buying into Unilever, Reckitt Benckiser, Next, AstraZeneca, EasyJet, Prudential, Googleand HSBC. And emerging market stocks and funds: Hutchison China Meditech, Ali Baba, Fidelity China Special Situations and JP Morgan Indian Investment Trust.
Put simply, if you cant see strong and rising profitability for a company youre looking to invest in over the next few years, then avoid. Forget about what made money in recent decades and fix your eyes firmly on the horizon in front of you.
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Prabhat Sakya owns shares in Fidelity China Special Situationsand JP Morgan Indian Investment Trust. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.