NYT: Emerging Markets Are Down, Not Out

IN a global slowdown, it’s only natural for investors to focus on parts of the world where economic growth remains strong — for instance, the rapidly expanding emerging markets.

Yet so far this year, bets on stocks in developing nations like China, India and Brazil have produced far greater losses than those in the domestic market. The Morgan Stanley Capital International Emerging Markets index has plummeted more than 10 percent, versus a 6.7 percent decline for the Standard & Poor’s 500 index of domestic stocks.

So have investors thrown in the towel on the emerging markets? Not in the least. In fact, between January and July, they plowed more than $12 billion in net new money into mutual funds that focus on developing-market stocks.

As investors stuck with this asset class, though, they also tweaked their strategies. Throughout much of the last decade, the way to win in emerging markets was to bet on producers. For instance, industrial companies throughout the developing world experienced a huge wave of growth as manufacturing left mature economies in the West.

So investors focused on parts of the industrial sector that benefited from the manufacturing boom. They bet on energy companies that powered factories and on commodity producers that met the rising demand for the raw materials needed to supply those factories and construction.

This year, though, the market has shifted. Industrial-oriented stocks have fallen 17 percent, or about seven percentage points more than the broad emerging markets.

Consumer-oriented companies, meanwhile, many of which are catering to the fast-growing middle class in places like China, have held up remarkably well. Shares of companies in emerging markets that make nonessential, or discretionary, consumer products are up around 3 percent this year.

“An overarching theme that’s occurring across the emerging markets is that the consumer base is blossoming into an income level that allows them to spend money on things beyond the necessities,” said Mark D. Luschini, chief investment strategist at Janney Montgomery Scott.

China, for example, is on track this year to overtake Japan in the number of vehicles it has on the road, putting it second behind the United States.

Arjun Jayaraman, a portfolio manager for emerging markets at Causeway Capital Management, said it was not surprising that some consumer companies had held up better than industrial ones. “Let’s face it: this slowdown is based in the developed world,” Mr. Jayaraman said. While companies that make and export goods to Europe and the United States will be hurt by slowing demand in the West, he said, “a consumer company in India or China that’s more dependent on the local markets will be more insulated from the global slowdown.”

To be sure, consumer companies aren’t a huge segment of the emerging markets. Combined, consumer discretionary stocks and shares of consumer staples companies — which make essential goods like food or toothpaste — make up just 16.5 percent of the Standard & Poor’s Emerging Broad Market index.

But Alec Young, international equity strategist at S.& P. Equity Research, said that these consumer-oriented companies could serve “as a port in the storm for investors who want exposure to the emerging markets but want to achieve it in a more conservative way.”

Investors must still be careful, though, with this group of stocks. “Stocks that are less sensitive to the global economy and that target local consumer demand have performed better, but as a result they’ve gotten more expensive,” said Jeffrey A. Urbina, co-portfolio manager of the William Blair Emerging Markets Growth fund.

The average price-to-earnings ratio for consumer discretionary stocks in the MSCI Emerging Markets index, for instance, is 13.4, based on the last 12 months of earnings. By comparison, the ratio for the broad emerging markets stands at 10.9.

As a result, many strategists say a cheaper — and less volatile — way to gain exposure to emerging-market consumers is through shares of large domestic and European multinational companies that generate a sizable portion of their revenue from those regions.

As examples, Simon Hallett, chief investment officer at Harding Loevner, an asset management firm, points to McDonald’s, whose shares are up 19 percent this year, and Colgate-Palmolive, up 12 percent. These stocks have performed so well in this volatile market “not just because they’re defensive stocks,” he said. “It also has to do with their long-term growth opportunities in emerging economies.”

sursa: Ney York Times

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