Each week, a professional investor tells MoneyWeek where she'd put her money now. This week: Odile Lange-Broussy from the emerging consumer equities team at Lombard Odier Investment Managers.
Emerging markets have been through one of their worst periods of underperformance (compared with developed markets) in two decades. Managing your macro exposure, and careful stock selection, are key to dealing with such periods. Investors should look for good corporate governance, market-leading companies, businesses with a high return on capital employed, and no leverage. Emerging markets are small markets, whether you seek equities, bonds or currencies. That means the exit doors are narrow and shut fast.
Still, with global bond markets looking peaky after a 30-year bull run, the question is: where is all the cash heading? The five-billion-strong emerging-world population is growing faster than the developed world, with long-term growth rates similar to Europe and the US post-1945. Meanwhile, Europe is in decline and, while America is rebounding, it's doing so far less vigorously than after previous recessions.
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The emerging world is far from uniform. It can be split into six blocks: China, southeast Asia, India, Africa and the Middle East, eastern Europe, and Latin America. They don't move at the same pace or in the same direction and there are vast differences within blocks. Vietnam's geographic neighbour, Thailand, is far away economically and politically. Chile has little in common with next-door Argentina; the same goes for Saudi Arabia and Egypt.
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But there are enough similarities to make them worthwhile bets for investors. Southeast Asia (Thailand, Malaysia, the Philippines, Vietnam and Indonesia) is enjoying well-balanced growth. Controlled debt-to-GDP ratios, sound financial institutions, a good split between infrastructure, consumption and exports, and falling corruption, are good signs. Chile, Colombia, Peru, Poland and Turkey are also in this group. Brazil, Argentina, South Africa and Ukraine are not problems lie ahead for these.
Emerging governments, particularly China, must expand their economies by encouraging the growth of the middle classes. Consumption will be the most important factor exports won't suffice, as Europe and the US cannot be net buyers of manufactured goods indefinitely. So we expect emerging-market growth in the food industry, beverages, supermarkets and restaurants. Hygiene is a priority: China in particular is being forced to modernise its entire food chain as happened in Europe and the US between 1945 and the 1980s. Russia, Indonesia and Mexico are following suit.
Risk management is vital to surviving volatile emerging markets, but longer term the growth trend is undeniable.
Yum! Brands (NYSE: YUM), China's top fast-food operator, could grow its store network by 50% to 9,000 by 2020. China accounts for 40%-50% of group operating profit, and the company also has exposure to India (targeting 2,000 stores by 2020 from 500 today) and Africa. Annual net profit growth has averaged 13% in 2002-2012.
Carlsberg (Denmark: CARLB) is the top beer company in Russia and in western China, and is also strong in western and Nordic Europe and southeast Asia. It trades at a discount to its peers because 40% of profits come from Russia, where the economy is weak and alcohol regulations are tightening. But we see signs of improvement here, and expect Carlsberg to rerate in the months ahead.
Sun Art (HK: 6808) is China's top hypermarket chain by sales. It is owned by Auchan (51%) and local partner RT-Mart (49%). Its network of 300 stores, located on China's east coast as well as in key
