Advertisement

What does flat pack furniture have to do with 6,480% returns?

Emerging markets have delivered huge gains in the past, but getting in early is no mean feat, says Lars Henriksson. That's where the 'Ikea index' comes in.

13-11-18-Ikea-China
Ikea has proved popular in China

The New York Times columnist Thomas Friedman said "The world is flat".

In his book of the same title, Mr Friedman argued that the convergence of technology and economics allowed China, India and other emerging economies to become part of the global supply chain for services and manufacturing.This created an explosion of wealth in the middle classes. Simply put, flattening the world allows the difference between emerging and developed markets to narrow over time.

Advertisement - Article continues below

Some sceptics have questioned his thesis, but I do believe it is particularly true for the consumer sector. Over the last five years or so, I have seen many emerging-market, consumer-related stocks rack up 'multi-bagger' gains. This is a remarkable performance, especially since many emerging markets have been treading water for some time.

These strong gains inevitably lead to strong interest. Investors are therefore frantically searching for the next frontier consumer market to invest in.

That's obviously not an easy assignment. So if you want a clue as to where to look next keep an eye on Ikea megastores

Ikea: the global consumer champion

A large part of its success relies on its strategy of offering "affordable solutions for better living". Famously, this includes selling furniture in flat packs.

That approach is a perfect match for the new middle class in emerging markets, who are the driving force of their economies.

Advertisement
Advertisement - Article continues below

I should confess that as a Swedish expatriate in Asia, the greatest thing about Ikea is that it offers a piece of Sweden at affordable prices. My family and I love to go to the local Ikea store wherever we are in the world, eat Swedish food and stock up on items from the delicatessen that are hard to find in local shops.

Our Ikea new stores' index

What can we learn from Ikea?

Advertisement - Article continues below

I think one major insight is that wherever Ikea decides to open up a maiden store, the consumer market has reached a tipping point. This is closely associated with buoyant returns from the stock market.

The retailer spends an awful lot of time scouting for new countries, negotiating with local parties and bureaucrats and determining the right mix of products for that country, as well as the timing of opening new stores.

Disregarding Europe and the US, I think it is particularly interesting to track the performance of new (maiden) stores in emerging economies.

For instance, it opened its first store in Hong Kong in 1975. Since then, the Hong Kong market has returned 6,480% - equivalent to a whopping 22.4% annual return.

The Ikea Asian new list store 'index' is as follows:Japan (1974),Hong Kong (1975),Singapore (1978),Taiwan (1994),Malaysia (1996),China (1998),Thailand (2011).

All of these markets have offered robust returns for investors since the first Ikea store was opened. Other notable emerging markets with solid gains include Russia (2000), Turkey (2005), Romania (2007), Bulgaria (2011), Lithuania (2013), Egypt (2013) and Qatar (2013).

Advertisement - Article continues below

Obviously there are periods when these markets have fluctuated sharply. But the overall trend suggests that the opening of a maiden Ikea store is a great opportunity for investors.

A flat world offers spiky returns

There are a number of emerging markets under consideration. But for reasons such as restrictive rules regarding modern retailing and harsh foreign ownership limits, they do not have a fixed opening date. In this category we find Asian countries such as India and South Korea.

One thing we do know for sure is that Indonesia will have its first taste of Ikea very soon.

A new store is scheduled to open in the western suburbs of Jakarta in July. And it makes perfect sense to me.

Indonesia is the world's fourth most populated country after China, India and the US. And consumption accounts for more than half of its GDP.

Recently the Indonesian stock market has taken a beating due to concerns about its fiscal and current account deficits. Foreign investors are also wary about the general election slated to take place in April 2014, followed by the presidential election in July.

These are all reasonable points. But the thing to bear in mind is that Ikea is a long-term investor and expects long-term returns.

If portfolio investors apply a similar long-term approach, I'm confident they can also look forward to healthy returns from a market like Indonesia.

Ikea is not a listed company and likely to remain so for the foreseeable future. But there are plenty of ways to play the Indonesia consumer story. So if you want to make money from the rise of Asia, you need to take a look at our sister publication Profit Hunter.

Finally, I'd like to point out that Mr Friedman was right to say that the world is flat, but a flat world doesn't mean flat returns!

Advertisement
Advertisement

Recommended

Visit/investments/stockmarkets/600688/bullish-investors-return-to-emerging-markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Visit/519872/beware-the-hidden-risks-when-investing-in-emerging-markets
Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019
Visit/517395/emerging-markets-buy-when-the-news-is-bad
Emerging markets

Emerging markets: buy when the news is bad

Emerging markets are being squeezed by local turmoil and by more general factors. But bad news can spell opportunity for investors.
5 Nov 2019
Visit/514936/emerging-markets-bounce-back-after-a-miserable-few-months
Features

Emerging markets bounce back after a miserable few months

Investors in emerging markets have been enjoying some long-awaited relief after a miserable few months.
13 Sep 2019

Most Popular

Visit/investments/investment-strategy/601387/how-john-maynard-keynes-learned-the-folly-of-market-timing
Investment strategy

How John Maynard Keynes learned the folly of market timing

In an extract from his book The Sceptical Investor, John Stepek explains how the great economist John Maynard Keynes came a cropper when he first star…
25 May 2020
Visit/investments/stockmarkets/emerging-markets/601362/a-new-lease-of-life-for-the-brics
Emerging markets

A new lease of life for the Brics

Emerging markets are having a surprisingly good crisis. Their long-predicted rise will now continue.
24 May 2020
Visit/investments/investment-strategy/601379/battling-volatility-the-benefits-of-an-active-manager
Sponsored

Battling volatility: The benefits of an active manager

SPONSORED CONTENT – Alastair Wilson, managing director of Close Brothers, on the advantages of active investing in times of crisis.
21 May 2020