I identify several types of Emerging market stocks by geography. I will lay them out in this article and explain what to look for in each type.
1-The developed-Emerging markets company.
This type of company is generally a very large developed country multinational that expanded successfully to have the majority of its sales volume or revenue outside of developed markets.
Examples: AB Inbev, which grew by a series of mergers and also has a long Brazilian history, LVMH, which sells a lot of its bags to Asian customers, even when the sales occur on European boutiques. We can find smaller companies like Bollore which has a logistic network in the African continent, as well as PayTV.
Many large multinationals like Unilever or Colgate-Palmolive have maybe 50% of sales in Emerging markets. Some Spanish companies like Banco Santander or Telefonica have a large presence in Latin America.
Advantages:
Familiarity for the investor
Usually some Developed markets sales percentage to help weather storms
Often superior brands due to long history
Superior organic growth when global growth is positive
Weaknesses:
Valuation are usually higher because the brands are well known
Slower growth when global growth is subdued.
2-The Emerging markets company that is not really one.
Some rare companies are based in EMs but do over 60% of their sales in Europe, Japan or North America. They are rare but exist. Maybe the management made acquisitions in those continents, or they found a lot of demand for their products.
Examples:
CK Hutchison (Hong Kong, China) does telecommunications, retail, and infrastructure in Europe and Australia. I have not verified the 60% exactly, but its not a rule, just an idea! They expanded through acquired investments.
Gruma (Mexico) is doing most of its business in the USA, where their products (Mexican Tortillas and wraps) are popular.
Bimbo (Mexico) is similar and bought large soft bread companies in the USA and Europe to become the leader.
Advantages:
Relative stability of Developed markets.
Usually cheaper price
Weaknesses:
No consumption levels catch up like in EMs
3-The Multicountry Emerging market company.
This company is based in EMs and has sales in several EMs.
Examples: Coca Cola Femsa sells drinks in Mexico, Central America, Brazil, Argentina.
MTN group is present in the whole African continent.
Ulker Biskuvi sells Biscuits in Turkey, the middle east, central Asia, Egypt..
Advantages:
Large scale and strength
Solid base to handle individual country issue
Weaknesses:
none
4-The Large country EM company.
The larger and more diversified a country is, the better it can handle economic crises without permanent damage and limited permanent capital flight. Yes it flows out, then returns quickly.
The strongest is China of course, followed by India, Brazil, Russia, who can sustain tough crises with strong stable positions. The countries of 1Billion plus people are solid, and Brazil and Russia with 220 and 145 millions and large resources are regional powers.
Then can come possibly Indonesia, Turkey, Mexico, Vietnam in the 100-200 million range, while fragile financially, have strong domestic market and growing industries.
These companies benefit from a huge internal market and do not really need to expand abroad to create returns for investors, Especially in China and India.
Examples: JD.com, Alibaba of course. But Also Telefonica Brazil.
Advantages:
Large market
Solid future economic growth
Weaknesses:
Political risk concentration
5-The small country/weak country EM company.
Here we have the medium size countries, such as Thailand, South Africa, Colombia who still have a decent size market and diverse economy, as well as large land area.
Some even more frontier type markets like Nigeria, Pakistan, Bangladesh, the Philippines have weaker domestic demand and finances, despite huge population.
Once we reach small countries, with a population under maybe 20-30 million, this is where the risk is higher for the investor. Many small countries do not have scale and demand to allow a company to grow significantly and can be more vulnerable to shocks.
Excluding frontier markets, we have Peru, Chile, Malaysia, Romania.
For small country EM companies, they will be closely linked to the domestic economy, will have less grow prospects, and carry a larger amount of risk than other categories. A higher degree of local knowledge is required to address macro economic prospects of the country.
On the political side thought, we have less erratic government intervention than the Large EMs, and even the USA, because these countries, being weaker than India and China and Indonesia, need to be attractive markets. They need the market inflows.
Examples: PLDT (Philippines), Remgro (South Africa), Beximco Pharma (Bangladesh)
Advantages:
valuations
governments cannot play cow boys as much as they want.
Weaknesses:
Limited market size
Weaker economy.
Political concentration.
Not many brokers cover them and few GDRs and ADRs.
6-The "I am developed but they call me Emerging" EM company.
Some very developed EMs do not need a large size to maintain stability like Poland and Korea, but they still have about 40-50 million people, on par with Spain or Canada and larger than the Netherlands.
They are developed nations but investor treat them as emerging markets.
- Hong Kong is still considered a country by investors, is developed, but has emerging market valuations.
Example: KT corp (Korea), Ambra (Poland).
Advantages:
valuations attractive
Weaknesses:
Low GDP or equipment growth
Conclusion
Each emerging market stock operates in a different type of environment, and we have to be aware of it before investing.
In more developed markets the consumer and demographic growth will be low, and we cannot expect drinks or food or mobile phone users volume to expand greatly, and we have to look at companies at attractive valuations that have products that will gain market share rather than just growing with the market, or companies that can extend their offerings. It could be also sophisticated products or services in a growing industry. These countries are moving up the value chain with innovative industries.
Companies that can expand to other markets, emerging or not, are the best type to own, because they are almost unlimited in growth potential.
Companies that work in a giant market like India, China, or even Brazil and Indonesia can grow a lot within the country, even if they stick to one industry.
Companies that work in small Ems are riskier, can be limited in size, but still, a holding company like Remgro in South Africa shows how diverse the industrial and consumer sector can be in an Emerging market of 55 million people. I am sure that mid size countries like Colombia, Thailand can offer companies much space to grow, but for that they need to adopt a multi industry or multi products approach.
The most accessible type of companies, the global stocks with a large EM businesses, have strong brands and are a good buy on weaknesses. Often overlooked by the market is their ability to have volume growth or to benefit from premiumisation of consumption, things that are already finished in developed markets.
You can buy a mostly US operation at half the price, if it is listed in Mexico.
Another simple reason to look at EM stocks is mostly just cheaper valuation.
After these introduction posts, I plan my future posts to be company light analysis and portfolio updates.
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