Myths To Ignore In Emerging Markets by Sammy Suzuki, AllianceBernstein
Investors are fleeing emerging equities en masse. We think they need a new playbook. Great investments can still be found across the developing world—just not in the usual places.
Macro conditions are a lot harsher than they were in the last decade, when China’s manufacturing juggernaut was in ascendance and spreading prosperity to other developing countries. Investors can no longer treat emerging markets as one homogeneous bunch—and should be prepared for rougher economic crosscurrents ahead.
But they shouldn’t reject these stocks outright, in our view. Emerging markets are still home to many of the world’s fastest-growing economies and most dynamic companies. New and exciting opportunities are surfacing every day. As we see it, winning in the future will depend on identifying pockets of strength—even in weak economies—and catching nascent trends before they become obvious to others.
Our first order of business, then, is to vanquish some of the long-held misconceptions obscuring today’s emerging-market (EM) investment picture. Here are five standouts:
- You have to predict Chinese policy to win. Wrong.
Measures of “old China”—flatlining power, cement and steel production—suggest an economy losing steam (Display). But even under conservative forecasts, China’s growth is still expected to create an economy the size of South Korea, Canada or Spain every two to three years. It defies logic to say that China isn’t incubating vast opportunities.
Many of these opportunities include “new China” industries catering to a rising consumer class (Display). Mobile-phone subscriptions, Internet shopping and online gaming are growing robustly. Sales of chewing gum and candy are brisk, as is spending on movies, traveling abroad, sportswear and cosmetics. Starbucks coffee shops are popping up in every major city. We think these businesses have only scratched the surface of their growth potential.
- It’s all about the commodity supercycle. Not quite.
Commodity supercycles are born every 20 to 40 years. The most recent one peaked in 2010. Resource-dependent economies and industries will remain hard pressed as pricing normalizes. But those that consume resources—India, for one—are already reaping rewards.
More to the point, EM investors need to keep their vistas wide. The industrial-manufacturing suppliers in Mexico, Vietnam, Poland, Hungary and the Czech Republic should continue to gain from China’s waning status as a source for low-cost labor and from reviving demand from developed-world customers. We’re also keeping an eye on developments in Argentina. Actions by the country’s newly elected, reform-minded government to undo the damage of the former regime’s policies have already reduced sovereign bond spreads and improved the competitiveness of its export industries.
The aging populations of emerging Asia are also creating new growth businesses. For example, South Korean convenience-store operators are gaining share with their smaller-format stores, which are easier for their increasingly elderly customers to navigate.
- EM consumers are the only source of growth. Here’s why not.
EM consumers are an important source of growth and are creating big opportunities for investors. But they aren’t the only game in town.
Many EM companies are making steady inroads with developed-market consumers. A large share of Mexico’s Gruma’s earnings growth is coming from selling tortillas to customers in the US, where its dominance gives it enormous competitive edge. Certain Mexican airports have become malls with runways, profiting from a captive customer base of big-spending foreign travelers. Emerging-Asian yarn spinners, fabric mills and sneaker makers are riding the phenomenal popularity of “athleisure” sportswear in the US and Europe.
- A stronger US dollar is bad for all EM companies. Not exactly right.
The strong US dollar is a boost for developing-world companies selling mostly locally made products to global markets. Brazilian jet maker Embraer and pulp and paper producers Suzano Papel e Celulose (Brazil) and Sappi (South Africa) are in this category.
- The best way to access EM growth is to invest in EM-domiciled companies. Not always.
Sometimes the developed-world parent of a developing-world subsidiary offers investors a more attractive entry into a lucrative EM business. For example, Suzuki Motor may look more attractively valued than its Indian subsidiary Maruti Suzuki—a key profit driver—for playing EM auto sales growth.
Owning parent company Anheuser-Busch InBev (ABI) may be a better deal than owning its subsidiary Ambev. In addition to a stake in Ambev, ABI gets you a dominant position in Mexico, a fast-growing profit stream from China and the world’s leading premium beer portfolio.
Emerging stock markets are more inefficient and prone to overreaction than their developed counterparts. There are many potentially lucrative trends unfolding, and we believe a targeted and differentiated stock-picking approach is the best way to capture them. Given the likely economic squalls ahead, successful EM investing will take a long-term view, skillful piloting and highly sensitive downside-risk radar. It will also take broadening horizons beyond the old, familiar places.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.