DEVELOPED EQUITIES: What it’s like to be in their shoes

Many developed world companies have turned to emerging markets to access growth, particularly in recent years. Nick Fitzpatrick talks to fund managers about benefiting from this through global funds.

If there is one Western company around today whose relationship with emerging markets has been fraught, it is Nike, but despite the 1990s child-labour scandal, the company’s business in these countries is booming.

Not only is most of its manufacturing in the developing world but Nike is also benefiting from the growing emerging market consumer story as sales increase there, too.
Emerging market footwear sales were up 22% through 2010, and in China the sales were up 19%. In contrast, sales in the United States increased only 8% while sales in western Europe fell 2%.

Nike’s management, which is opening store after store in India, says there are nearly 80 million new additions to the middle classes in the developing world a year, and in key markets such as China, India and Brazil, the middle class could triple in the next two to three decades.

Fund managers who focus on North American or western European equities are increasingly taking emerging market business into account in deciding which companies to invest in.

Horacio A. Valeiras, chief investment officer at Allianz Global Investors (AGI) Capital, says: “If you are a Western company and not exposed to emerging markets, you probably aren’t growing much.”

More than 40% of earnings for Standard & Poor’s 500 companies come from outside the US and the fastest growing contributors are the emerging markets, he says.

AGI Capital accesses emerging market growth through revenues from Western companies in its Global Select and International Growth funds.

Matthias Born, co-fund manager of the Euroland and Europe Equity Growth funds at RCM, says that European companies with the highest exposure to emerging market growth are found in the industrial, auto, and consumer sectors, while telecoms and utilities are the least exposed.

Industrial stocks such as Germany’s Siemens and France’s Schneider Electric have good exposure, says Born, particularly to China through power generation products.

Among consumers it is luxury goods firms such as LVMH, which owns the Louis Vuitton brand, that are major beneficiaries from the growing middle class consumer.

“Luxury goods have highest exposure and demand is growing quickly,” he says.

Many European companies he invests in have sales of 25 to 40% in emerging markets – but they also carry European risk.

“This is a factor,” adds Born. “You have to analyse their end market and the demand for their products in Europe. We look for companies that have strong demand for products overall.

“The end market growth for Siemens is less in Europe than elsewhere, but it’s growing.

“It is the countries with the higher exposure to southern Europe that have highest risk.”

Fund managers need to see how well Western firms can translate top-line economic growth in these regions into bottom-line performance. This is not always easy.

Asia-Pacific has been one of the best performing regions in recent years, though a company’s financial statements will not always split out Japan from the more emerging or frontier markets found in the region.

Valeiras says: “Most companies do not break out sales and profitability country by country so it is not that easy to see into them. Obviously, more data would be better, but at least we get the regional splits. We need more information on sales growth rather than just profitability.”

Nevertheless, Western firms are relatively transparent and this is an advantage from a risk perspective of investing in European companies that have the emerging market growth story behind them.

Born points out that Western companies will have generally higher standards of corporate governance and clearer valuations.

©2011 funds europe



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