Understanding ASEAN: Seven things you need to know

Where will the next rising star countries come from? Aivars Lode

Southeast Asia is one of the world’s fastest-growing markets—and one of the least well known.

China remains the Goliath of emerging markets, with every fluctuation in its GDP making headlines around the globe. But investors and multinationals are increasingly turning their gaze southward to the ten dynamic markets that make up the Association of Southeast Asian Nations (ASEAN). Founded in 1967, ASEAN today encompasses Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam—economies at vastly different stages of development but all sharing immense growth potential. ASEAN is a major global hub of manufacturing and trade, as well as one of the fastest-growing consumer markets in the world. As the region seeks to deepen its ties and capture an even greater share of global trade, its economic profile is rising—and it is crucial for those outside the region to understand its complexities and contradictions. The seven insights below offer a snapshot of one of the world’s most diverse, fast-moving, and competitive regions.

7 Things you need to know about ASEAN

The ten member states of the Association of Southeast Asian Nations collectively comprise the seventh-largest economy in the world. Here are some critical facts.

1. Together, ASEAN’s ten member states form an economic powerhouse.

If ASEAN were a single country, it would already be the seventh-largest economy in the world, with a combined GDP of $2.4 trillion in 2013 (Exhibit 1). It is projected to rank as the fourth-largest economy by 2050.¹ 1. Based on forecasts by IHS.

Labor-force expansion and productivity improvements drive GDP growth—and ASEAN is making impressive strides in both areas. Home to more than 600 million people, it has a larger population than the European Union or North America. ASEAN has the third-largest labor force in the world, behind China and India; its youthful population is producing a demographic dividend. Perhaps most important, almost 60 percent of total growth since 1990 has come from productivity gains, as sectors such as manufacturing, retail, telecommunications, and transportation grow more efficient.

To capitalize on these trends, however, the region must develop its human capital and workforce skills. In Indonesia and Myanmar alone, we project an undersupply of 9 million skilled and 13 million semiskilled workers by 2030.

2. ASEAN is not a monolithic market.

ASEAN is a diverse group. Indonesia represents almost 40 percent of the region’s economic output and is a member of the G20, while Myanmar, emerging from decades of isolation, is still a frontier market working to build its institutions. GDP per capita in Singapore, for instance, is more than 30 times higher than in Laos and more than 50 times higher than in Cambodia and Myanmar; in fact, it even surpasses that of mature economies such as Canada and the United States. The standard deviation in average incomes among ASEAN countries is more than seven times that of EU member states. That diversity extends to culture, language, and religion. Indonesia, for example, is almost 90 percent Muslim, while the Philippines is more than 80 percent Roman Catholic, and Thailand is more than 95 percent Buddhist. Although ASEAN is becoming more integrated, investors should be aware of local preferences and cultural sensitivities; they cannot rely on a one-size-fits-all strategy across such widely varying markets.

3. Macroeconomic stability has provided a platform for growth.

Memories of the 1997 Asian financial crisis linger, leading many outsiders to expect that volatility comes with the territory. But the region proved to be remarkably resilient in the aftermath of the 2008 global financial crisis, and today it is in a much stronger fiscal position: government debt is under 50 percent of GDP—far lower than the 90 percent share in the United Kingdom or 105 percent in the United States.

Most of the region has held steady so far, despite concern about the effect on emerging markets of the potential end of quantitative easing by the US Federal Reserve. In fact, ASEAN has experienced much lower volatility in economic growth since 2000 than the European Union. Savings levels have also remained fairly steady since 2005, at about a third of GDP, albeit with large differences between high-saving economies, such as Brunei, Malaysia, and Singapore, and low-saving economies, such as Cambodia, Laos, and the Philippines.

4. ASEAN is a growing hub of consumer demand.

ASEAN has dramatically outpaced the rest of the world on growth in GDP per capita since the late 1970s. Income growth has remained strong since 2000, with average annual real gains of more than 5 percent. Some member nations have grown at a torrid pace: Vietnam, for example, took just 11 years (from 1995 to 2006) to double its per capita GDP from $1,300 to $2,600. Extreme poverty is rapidly receding. In 2000, 14 percent of the region’s population was below the international poverty line of $1.25 a day (calculated in purchasing-power-parity terms), but by 2013, that share had fallen to just 3 percent.

Already some 67 million households in ASEAN states are part of the “consuming class,” with incomes exceeding the level at which they can begin to make significant discretionary purchases (Exhibit 2).³ 3. Defined as households with more than $7,500 in annual income (in purchasing-power-parity terms).That number could almost double to 125 million households by 2025, making ASEAN a pivotal consumer market of the future. There is no typical ASEAN consumer, but some broad trends have emerged: a greater focus on leisure activities, a growing preference for modern retail formats, and increasing brand awareness (Indonesian consumers, for example, are exceptionally loyal to their favorite brands).

Urbanization and consumer growth move in tandem, and ASEAN’s cities are booming. Today, 22 percent of ASEAN’s population lives in cities of more than 200,000 inhabitants—and these urban areas account for more than 54 percent of the region’s GDP. An additional 54 million people are expected to move to cities by 2025. Interestingly, the region’s midsize cities have outpaced its megacities in economic growth. Nearly 40 percent of ASEAN’s GDP growth through 2025 is expected to come from 142 cities with populations between 200,000 and 5 million.

ASEAN consumers are increasingly moving online, with mobile penetration of 110 percent and Internet penetration of 25 percent across the region. Its member states make up the world’s second-largest community of Facebook users, behind only the United States. But there are vast differences in adoption. Hyperconnected Singapore has the fourth-highest smartphone penetration in the world, and almost 75 percent of its population is online. By contrast, only 1 percent of Myanmar has access to the Internet. Indonesia, with the world’s fourth-largest population, is rapidly becoming a digital nation; it already has 282 million mobile subscriptions and is expected to have 100 million Internet users by 2016.

5. ASEAN is well positioned in global trade flows.

ASEAN is the fourth-largest exporting region in the world, trailing only the European Union, North America, and China/Hong Kong. It accounts for 7 percent of global exports—and as its member states have developed more sophisticated manufacturing capabilities, their exports have diversified. Vietnam specializes in textiles and apparel, while Singapore and Malaysia are leading exporters of electronics. Thailand has joined the ranks of leading vehicle and automotive-parts exporters. Other ASEAN members have built export industries around natural resources. Indonesia is the world’s largest producer and exporter of palm oil, the largest exporter of coal, and the second-largest producer of cocoa and tin. While Myanmar is just beginning to open its economy, it has large reserves of oil, gas, and precious minerals. In addition to exporting manufactured and agricultural products, the Philippines has established a thriving business-process-outsourcing industry. China, a competitor, has become a customer. In fact, it is now the most important export market for Malaysia and Singapore. But demand from the United States, Europe, and Japan continues to propel growth.⁵ 5.“Ten of Asia’s most dynamic export processing zones that you’ve never heard of,” Asia Briefing, April 24, 2014, asiabriefing.com.

Export-processing zones, once dominated by China, have been established across ASEAN. The Batam Free Trade Zone (Singapore–Indonesia), the Southern Regional Industrial Estate (Thailand), the Tanjung Emas Export Processing Zone (Indonesia), the Port Klang Free Zone (Malaysia), the Thilawa Special Economic Zone (Myanmar), and the Tan Thuan Export Processing Zone (Vietnam) are all expected to propel export growth.

The region sits at the crossroads of many global flows. Singapore is currently the fourth-highest-ranked country in the McKinsey Global Institute’s Connectedness Index, which tracks inflows and outflows of goods, services, finance, and people, as well as the underlying flows of data and communication that enable all types of cross-border exchanges.⁶ 6. For further details, see the full McKinsey Global Institute report, Global flows in a digital age: How trade, finance, people, and data connect the world economy, April 2014. Malaysia (18th) and Thailand (36th) also rank among the top 50 most connected countries. ASEAN is well positioned to benefit from growth in all these global flows. By 2025, more than half of the world’s consuming class will live within a five-hour flight of Myanmar.

6. Intraregional trade could significantly deepen with implementation of the ASEAN Economic Community, but there are hurdles.

Some 25 percent of the region’s exports of goods go to other ASEAN partners, a share that has remained roughly constant since 2003. While this is less than half the share of intraregional trade seen in the North American Free Trade Agreement countries of Canada, Mexico, and the United States and in the European Union, the total value is climbing rapidly as the region develops stronger cross-border supply chains.

Intraregional trade in goods—along with other types of cross-border flows—is likely to increase with implementation of the ASEAN Economic Community integration plan, which aims to allow the freer movement of goods, services, skilled labor, and capital. Progress has been uneven, however. While tariffs on goods are now close to zero in many sectors among the original six member states (Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand), progress on liberalization of services and investment has been slower, and nontariff barriers remain a stumbling block to freer trade.

While deeper integration among its member states remains a work in progress, ASEAN has forged free-trade agreements elsewhere with partners that include Australia, China, India, Japan, New Zealand, and South Korea. It is also party to the Regional Comprehensive Economic Partnership trade negotiations that would form a megatrading bloc comprising more than three billion people, a combined GDP of about $21 trillion, and some 30 percent of world trade.

7. ASEAN is home to many globally competitive companies.

In 2006, ASEAN was home to the headquarters of 49 companies in the Forbes Global 2000. By 2013, that number had risen to 74. ASEAN includes 227 of the world’s companies with more than $1 billion in revenues, or 3 percent of the world’s total (Exhibit 3). Singapore is a standout, ranking fifth in the world for corporate-headquarters density and first for foreign subsidiaries.⁷ 7. Headquarters density is the ratio of the revenue of all large companies (defined as those with revenue of $1 billion or more) headquartered in a given country to that country’s GDP in 2010. For further details, see the full McKinsey Global Institute report, Urban world: The shifting global business landscape, October 2013.

Consistent with this growth, foreign direct investment in ASEAN has boomed, surpassing its precrisis levels. In fact, the ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) attracted more foreign direct investment than China ($128 billion versus $117 billion) in 2013.⁸ 8.Based on data from Bank of America Merrill Lynch. In addition to attracting multinationals, ASEAN has become a launching pad for new companies; the region now accounts for 38 percent of Asia’s market for initial public offerings.

Despite their distinct cultures, histories, and languages, the ten member states of ASEAN share a focus on jobs and prosperity. Household purchasing power is rising, transforming the region into the next frontier of consumer growth. Maintaining the current trajectory will require enormous investment in infrastructure and human-capital development—a challenge for any emerging region but a necessary step toward ASEAN’s goal of becoming globally competitive in a wide range of industries. The ASEAN Economic Community offers an opportunity to create a seamless regional market and production base. If its implementation is successful, ASEAN could prove to be a case in which the whole actually does exceed the sum of its parts

Calpers Pulls Back From Hedge Funds

By Dan Fitzpatrick

Public pensions from California to Ohio are backing away from hedge funds because of concerns about high fees and lackluster returns.

Those having second thoughts include officials at the largest public pension fund in the U.S., the California Public Employees' Retirement System, or Calpers. Its hedge-fund investment is expected to drop this year by 40%, to $3 billion, amid a review of that part of the portfolio, said a person familiar with the changes. A spokesman declined to comment on the size of the reduction but said the fund is taking more of a "back-to-basics approach" with its holdings.

The retreat comes after many pension funds poured money into hedge funds in recent years in hopes of making up huge shortfalls.

The officials overseeing pensions for Los Angeles's fire and police employees decided last year to get out of hedge funds altogether after an investment of $500 million produced a return of less than 2% over seven years, according to Los Angeles Fire and Police Pensions General Manager Ray Ciranna. The hedge-fund investment was just 4% of the pension's total portfolio and yet $15 million a year in fees went to hedge-fund managers, 17% of all fees paid by the fund.

Before 2004, public pensions favored plain-vanilla investments and avoided hedge funds almost entirely, according to data compiled by consultant Wilshire Trust Universe Comparison Service. Public pensions began wading into hedge funds roughly a decade ago as they sought to boost long-term returns and close the gap between assets and future obligations to retirees."We were ready to move on," Mr. Ciranna said.

Hedge funds typically bet on and against stocks, bonds or other securities, often using borrowed money. Hedge funds also charge higher fees, usually 2% of assets under management and 20% of profits.

Many hedge funds dropped less than the overall market during the financial crisis, and some even posted outsize gains by anticipating the collapse. That performance accelerated the flow of pension money into hedge funds.

The move was part of a wider embrace of alternative investments, including private equity and real estate, as pension officials looked to diversify holdings in case more conventional investments faltered. They also hoped bigger investment gains would help them avoid extracting larger contributions from employees or reducing benefits for current or future retirees.

With many hedge funds, that sort of outperformance hasn't materialized in recent years: Average public-pension gains from hedge funds were 3.6% for the three years ended March 31 as compared with a 10.9% return from private-equity investments, a 10.6% return from stocks and 5.7% from fixed-income investments, according to a Wilshire review of public pensions with more than $1 billion in assets.

After peaking at 1.81% in 2011, pension allocations to hedge funds dipped to 1.21% of total portfolios as of March 31, according to Wilshire's review.

The average amount committed to private equity, by comparison, still is climbing. Those investments jumped to a decadelong high of 10.5% as of March 31, according to Wilshire. Stocks and bonds are still the dominant investments for all public pensions.

The reconsideration of hedge funds as an investment option hasn't produced significant shifts inside all funds. Some big public pensions said they are holding firm on commitments or increasing allocations as they worry about how stocks will perform in any future downturn. About half of the U.S. public pensions still have some sort of hedge-fund investment, according to data tracker Preqin.

"We are seeing a little moving away from hedge funds," but so far it's "just on the margin," said Verne Sedlacek, the chief executive of Commonfund, a nonprofit that manages money for pension funds, endowments and other nonprofit groups.

How far Calpers goes with its hedge-fund review may influence decisions at other public pensions because of its size in the industry. The current value of its assets is roughly $301 billion. The examination began in March as officials inside the fund began raising questions about whether hedge funds are too complicated or can effectively balance out poor-performing stocks during a market crash, said a person familiar with the situation.

A Calpers spokesman said the investment staff will make a formal recommendation to the board in the fall. But some cuts already have been made, said the person familiar with the situation. Hedge funds represented 1.5% of Calpers's total assets, or $4.5 billion, as of June 30.

Other states have made reductions as well. The School Employees Retirement System of Ohio decided to lower its hedge-fund allocation to 10% by fiscal 2015 as compared with roughly 15% in fiscal 2013 after investment gains were lower than expected, according to a spokesman. New Jersey's State Investment Council lowered its planned allocation to hedge funds to 12% from 12.25% as part of its fiscal 2014 plan, according to a spokesman.

The debate in San Francisco is indicative of those under way nationwide.

Board members of the San Francisco Employees' Retirement System are considering whether to invest 15% of assets into hedge funds for the first time. A debate about that strategy dominated a June meeting, in which board member Herb Meiberger argued hedge funds have blown up in the past and aren't the only investment alternative. The fund's executive director couldn't be reached for comment Wednesday.

Mr. Meiberger said at the meeting that he had sought out Warren Buffett's advice on the matter. The billionaire investor's handwritten response: "I would not go with hedge funds—would prefer index funds."

NAB to Sell Parcel of U.K. Commercial Real-Estate Loans

Looks like the Aussie banks had some exposure to European loans, this will probably depress their earnings. Aivars Lode

NAB to Sell Some Commercial Real Estate Loans
By Robb M. Stewart

MELBOURNE, Australia— National Australia Bank Ltd. NAB.AU -0.52% has agreed to sell a £625 million (US$1.06 billion) basket of mainly distressed U.K. loans to private-equity firm Cerberus Global Investors, further distancing the Australian bank from a business that has weighed on it for years.

When the deal is settled, it is expected to release about £127 million in capital for NAB, which had taken on the commercial real-estate portfolio of its British banking units about two years ago as the country's economy continued to struggle.

"This sale represents a substantial de-risking," Andrew Thorburn, who takes over as chief executive of Melbourne-based NAB at the start of August, said in a statement Monday.

The U.K. operations of NAB—Australia's largest bank by assets, but the smallest of the country's four big lenders by market value—were hard hit by soured property loans and rising funding costs as Britain struggled through the worst recession in a generation. When Britain's recovery stalled in 2012, NAB refocused its Clydesdale Bank and Yorkshire Bank units on retail operations and business lending and transferred most of the commercial real-estate portfolio to the parent company.

NAB bought Scotland's Clydesdale in 1987 and Yorkshire Bank in 1990. Departing CEO Cameron Clyne for years has said the U.K. banks needed greater scale and NAB would either need to beef up the operations or exit. Some analysts have speculated the move by Lloyds Banking Group PLC to list TSB Banking Group PLC in June could encourage NAB to unload its U.K. operations.

Mr. Thorburn said the Australian bank continued to look at opportunities to accelerate the sale of noncore assets, although didn't offer further details.

Omkar Joshi, an investment analyst at Watermark Funds Management in Sydney, said the sale only leads to a marginal capital release, so isn't t material to NAB in itself, but it would be positive if the bank can pull off more sales.

"The question remains why they didn't sell a bigger portfolio of loans," Mr. Joshi said.

The loans being sold to Cerberus are either in default, or passed or near maturity.

NAB said the deal will reduce its U.K. commercial real-estate portfolio by 20% to £2.38 billion and cut impaired loans by 48%. Because the sale isn't subject to regulatory or any other approval, the assets will immediately be taken off NAB's balance sheet.

NAB narrowed the loss before one-time items and certain costs in its U.K. commercial real-estate portfolio to £7 million in the six months through March, from a £149 million loss a year earlier, thanks in part to a slowdown in the emergence of new impaired loans and as the bank continued to run down the portfolio, reducing it by £700 million in the six-month period.

The U.K. business has been a drag on NAB while Australia's big lenders have seen record earnings on the back of low interest rates, strong mortgage lending, and sharp cuts in costs and bad debts. NAB's net profit rose 16% to 2.86 billion Australian dollars (US$2.68 billion) in the first half of its fiscal year as revenue increased 2.6% and its charge for bad and doubtful debts fell by more than 50%.

America's Business Puzzle: Record Debt and Record Cash

Trying to avoid tax will always come back to bite you. Aivars Lode

Clocks tick for tax avoidance practice.

U.S. companies taking advantage of a widely used tax-avoidance maneuver face a ticking clock: The days of ultralow interest rates, courtesy of the Federal Reserve, are numbered.

The result is a peculiar situation in which U.S. companies simultaneously have issued record amounts of debt—both in nominal terms and as a percent of gross domestic product—and hold what appears to be record amounts of cash overseas. U.S. companies borrowed another $223 billion in the first quarter of the year.Since 2008, the Fed's easy cash policies have allowed companies to buy back stock, pay dividends and make acquisitions largely without tapping cash from overseas subsidiaries. By leaving foreign profit overseas, companies avoid the sting of the U.S.'s 35% federal tax rate on it.

"It is a perfect financial blueprint to really encourage keeping money overseas and not redeploying it back here, and to leverage up," said Fredric Reynolds, former chief financial officer of CBS and a board member of AOL Inc., AOL +1.84%Mondelez International Inc. MDLZ -1.22%and Hess Corp. HES -0.61% "You'd be criticized if you didn't."

But the technique may be on borrowed time. It is likely to lose some luster as the Fed's easy-money policies cool and Congress revisits tax rules that encourage businesses to stockpile cash overseas and even to relocate to low-tax countries.

"You've just added a huge, extra fixed cost," Mr. Reynolds says. "It's a low rate, but if your business drops 5% or 6%, making that interest payment is going to get harder."And as rates tick up, the risk accompanying all that debt rises as well. Too much debt on its own can weaken debt ratings and make investors jittery. And a crisis or a downturn—whether economic, industrywide or company-specific—could hamper a company's ability to make interest payments, or to repay or refinance the debt as it comes due.

Corporate-tax rules are already getting official scrutiny after a recent rash of corporate "inversions" in which companies merge with overseas companies to gain lower tax rates and tap offshore cash. President Obama and other administration officials have criticized inversions, and Sen. Ron Wyden (D., Ore), who heads the powerful Senate Finance Committee, has called to retroactively ending the tax benefit. He and other lawmakers also are pushing for a broader corporate-tax overhaul, though meaningful progress isn't expected before November's midterm elections.

Few corporations publicly say they are borrowing to avoid a tax hit, but analysts and economists say the dynamic is clear. "The aggressively friendly debt market is allowing companies to borrow instead of repatriate cash," says Andrew Chang, an analyst for Standard & Poor's, who describes the move as "synthetic cash repatriation."

Take Honeywell International Inc.HON +0.52% Last year the Morristown, N.J., company reported a $1.9 billion increase in foreign earnings that it says have been permanently reinvested overseas, bringing the total to $13.5 billion, up 16% from a year ago. At the same time, the company also increased its debt by 18%, or about $1.3 billion.

Honeywell Chief Financial Officer Tom Szlosek expects the company's cash and debt to be basically equal by the end of the year, a situation he describes as out of step with how industrial companies are generally run. "But when you peel it back a little bit you see that almost all of our debt is in the U.S. and all our cash is overseas," Mr. Szlosek said.

Honeywell's U.S. earnings would be sufficient to pay for dividends, buybacks and minimal capital expenditure, but not much more, he said. Yet drawing on its offshore cash would incur a "cost prohibitive" tax hit, so Honeywell instead taps the debt markets. "It would be wonderful to be able to take the cash that we have overseas and be able to use it," he said.

A spokesman for the Fed declined to comment. Federal Reserve Chairwoman Janet Yellen earlier this month deflected questions about tax policy and overseas earnings, saying it was the responsibility of Congress and the White House.

By law, the Fed considers three objectives when setting monetary policy, including interest-rate targets: controlling inflation, maximizing employment and moderating long-term interest-rates. But the unintended effects of its policies can be much more diverse. Easy money ahead of the financial crisis helped run up the price of everything from forest land to housing. This year, Fed officials have expressed concern that, in the long run, low rates may again be inflating the value of assets and encouraging risky investment decisions.

Another effect may be tax avoidance. There are no comprehensive numbers on foreign cash and liquid securities held by U.S. companies, but Moody's MCO -0.31% Analytics estimates that some $950 billion in cash is held offshore by the more than 1,100 nonfinancial companies whose debt it rates. That accounts for more than half of the record $1.64 trillion in cash held by the companies at year-end, Moody's says.

Companies have been accumulating cash at a rapid clip, doubling it since 2007, according to S&P. Meanwhile, the debt taken on by nonfinancial companies reached a record $9.6 trillion in March, up from $6.5 trillion in early 2007. The first-quarter figure set a new high since at least 1955 in both absolute terms and relative to the economy as a whole, at 57% of gross domestic product—the sixth consecutive quarterly record, according to data from Moody's.

That debt not only allows companies to keep profits untaxed overseas, it also generates interest costs that can be used to generate tax deductions at the higher U.S. rate.

But when S&P looks at corporate balance sheets it doesn't fully value cash held overseas in its ratings calculations. The ratings company discounts offshore cash by about 25% on average, an estimate of how much companies would have to pay to Uncle Sam if they brought the money to the U.S. That S&P considers corporate cash at all when measuring a company's indebtedness is itself a sign of how unusual the times are: Until recently, the company saw no need, because big borrowers rarely had big cash hoards too.

Among more than 240 companies disclosing increases in unremitted foreign earnings in 2013, those with bigger increases tended to also see bigger increases in corporate debt, according to data from research firm Calcbench.

By borrowing at home, companies can do things like buy back stock—generally done from a company's home country—without taking the tax hit to bring offshore cash to the U.S. parent.

International Business Machines Corp. IBM -1.03% increased its permanently reinvested overseas earnings by 18% to $52.3 billion last year. At the same time, the company increased its borrowing by $6.4 billion, or 19%, to $39.7 billion. IBM is in the midst of a five-year plan to repurchase $50 billion of its own stock.

Medical-device maker Medtronic Inc. MDT -0.49% had accumulated $20.5 billion in unremitted foreign earnings by the end of 2013, up 13% from the prior year. At the same time, its debt has risen 12% to $11.9 billion.

A Medtronic spokesman said the company's debt and foreign earnings change independently. Acquisitions, share repurchases and the amount of cash generated within the U.S. can affect the company's debt requirements, while similar factors affect the demand for cash outside the U.S., and the amount available after those demands are met, spokesman Fernando Vivanco said.

The company held $14 billion in cash and marketable investments in its offshore subsidiaries las year, up from $10.9 billion the prior year. Medtronic is putting some of its offshore cash to use. In June it announced plans to buy rival Covidien COV -2.03% PLC for $42.9 billion, at least in part to adopt Covidien's lower-tax corporate home in Ireland.

Rising foreign cash holdings correspond to a growing share of earnings derived from outside U.S. borders as companies expand around the globe. And the figure is rising, too. About 40% of Honeywell's sales originate outside the U.S., for example, while more than 55% of IBM's do.

And, of course, low interest rates make it a feasible strategy to borrow against those untapped profits.

"Repatriation of foreign earnings is an expensive proposition," says Robert Sicina, formerly chief financial officer at divisions of American Express Co. AXP -0.17% and Citibank. "The cash is not really usable for U.S. purposes. Your alternative is to borrow—it's a great alternative.