Rising Profits From Emerging Markets + Vic Wisemann’s Thoughts on: CAT, AVP, CL, NOK, MOT, CHL, VOD, TEF
 InvestorsObserver Featured Contributor Vic Wisemann |
One of the biggest shocks for investors during the financial meltdown that started about a year ago was that there was nowhere to hide. Few strategies were able to protect portfolios from the sweeping downturn and even some money-market funds which were yielding virtually nothing anyway nearly went into the tank. It was the same overseas as it was in the United States, with practically no country immune.
The question, though, is what, if anything, did we learn? According to some top overseas fund managers, the biggest lesson involved not panicking. They point out that too many people had overly conservative strategies that triggered their pullout from the markets just as they reached their lows, and their subsequent defensive stance left them on the sidelines in the current recovery.
What to do now? Some money managers believe we should continue to plumb emerging markets for returns. But you don't need to be too aggressive. Many stable multinational corporations do large portions of their business in developing nations, making them good ways to play the trend.
Read on to see how you can profit from growth in emerging markets today.
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Investors around the world have been pouring money into emerging-market stocks faster this year than at any other comparable time on record, despite strategists' fears of a bubble.
They plowed a record $35.5 billion into emerging-market stock funds in the first half, according to funds-flow research firm EPFR Global. By contrast, investors withdrew $61 billion from developed-market stock funds over the same period according to EPFR.
The MSCI Barra Emerging Markets index is up 60% in dollar terms this year through September, while Standard & Poor's 500-stock index is up 17%.
Part of the appeal is that with developed economies in financial turmoil, emerging markets offer the possibility of faster growth and more financial security thanks to less debt lurking. This is a change. In the past, they were considered very risky, but it was widely assumed that investors got paid for taking that risk. Now they appear to have safe-haven status as well as offering the traditional prospect of more growth.
Emerging markets represent approximately 75% of the world's land mass and house more than 80% of the global population. Most of the future population growth is expected to be in emerging markets, where the population is expected to grow five times as fast as in developed countries. This means emerging markets tend to have a high and growing proportion of young, skilled people.
By 2030, more than one billion people in emerging markets are forecast to join the ever-increasing consumer middle class. Currently, personal consumption in China accounts for only 37 percent of GDP, compared with more than 60 percent and 70 percent in Europe and the US, respectively. There is, therefore, scope for significant further spending.
The world's savings are concentrated in emerging markets, which hold 75% of the world's total foreign exchange reserves. Emerging economies are less indebted than their developed peers at the country, company and individual level.
Importantly, banks in emerging-market countries have emerged from the recent credit crisis relatively unscathed as they generally had little or no exposure to the ‘toxic assets' associated with the sub-prime mortgage fallout in the US. This provides strong foundations on which to build future growth.
Emerging markets may have surged too quickly for many investors to catch. Could there be a second chance with consumer-staples companies with heavy exposure to developing economies?
While the U.S. tries to creep out of recession, parts of the developing world seem to have bounced back faster. Valuations in stock markets such as Brazil have doubled from their lows. In turn, investors have flocked back to large companies with international exposure, such as Caterpillar (CAT).
And yet, many consumer-products stocks with large emerging-markets exposure haven't been rewarded to the same degree. Take Avon Products (AVP); roughly 60% of the company's sales are in emerging markets, which are far more profitable than its domestic business. Avon's Latin American business has operating margins of about 18% compared with 10% in North America.
Colgate-Palmolive (CL), with roughly half its sales in emerging markets, already has been protecting margins by passing input costs to consumers. That is largely because it has few competitors in many markets. In some South American countries, it sells the majority of all toothpaste consumed. That has helped it maintain double-digit-percentage organic sales growth in emerging markets over the past year.
Technology companies are also poised to benefit greatly from a rise in emerging markets. The growing proportion of young, skilled people will be looking to the latest tech gadgets. Nokia (NOK), the worlds biggest manufacturer of mobile devices, still enjoys a 40% global market share, dwarfing it’s nearest competition: Motorola (MOT), Sony-Ericsson, Samsung, & LG.
The company is particularly strong on an international basis, with top market share in practically all markets served. More importantly, a significant percentage of sales come from outside the US. With recent advances in 3G licensing in Asia, notably Vietnam, India & China, Nokia looks well set to come out as the real winner from the mobile broadband explosion.
A hedged trade on NOK, you may want to consider the November 13/11 Bull Put spread for a 30 cent credit. That's a 17.6% return and the stock has to fall 8.2% to cause a problem.
If Nokia can crack some key markets in SE Asia, India & China, they will be able to surpass their upstart rivals; although in China, native handset makers will obviously have a first pass like TD-SCDMA with China Mobile (CHL). Nokia has a long track record with Vodafone (VOD), Orange & Telefonica (TEF), all of whom are increasingly active in Emerging Markets.
If you have any additional thoughts, ideas or emerging profit opportunities, please e-mail me at
vwisemann@InvestorsObserver.com.
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