Picking emerging-market winners
Equities can seem risky right now, but those companies with potential can still be identified
Like many, you might be looking to increase your equities holdings, but unsure of where to go. The rises in Japanese and American shares are built on central bank money-printing, and events last week showed they are vulnerable to an unwinding of those schemes. Thailand and the Philippines look pricey after a long rally. Hong Kong's Hang Seng Index seems stuck at the 23,000 level. A-shares are an unremitting quagmire eerily disconnected to fundamentals.
But for those looking for specialised themes, there are options. Hartmut Issel, head of UBS CIO wealth management research, has three equities investment ideas he thinks have legs.
Idea 1: Western winners
Issel likes Western firms with 20 per cent or more sales in emerging markets. His theory is that these firms have strong brands that give them pricing power.
He believes that this gives investors the best of both worlds: emerging markets growth combined with developed market margins. His implied comparison is with comparable firms based in emerging markets, whose branding is not as strong. These firms may come under profit pressure during years of high inflation, as consumers balk at repeated price increases.
"The Western companies are in a better position to pass on cost pressure. They don't discount as much," Issel says. He points to large carmakers and luxury goods vendors as examples of firms that generate strong growth in emerging markets while maintaining decent profit levels.
Idea 2: Global giants
This is a twist on the Western winners concept. Here Issel looks for Fortune 500 firms based in emerging markets but which generate 20 per cent of their sales outside their home market.
The concept is that many of the giant firms in emerging markets depend on protection in their home market, perhaps even outright monopoly. These firms are big but weak, as they don't have the capacity to compete without state help. But many emerging-markets giants are competitive, and are identified by the percentage of sales offshore, to non-protected markets.
"If you sell more than one-fifth of your products outside your country, this is by definition where you don't have a monopoly. They could be everywhere," says Issel, who points to the Korean technology names and carmakers as examples.
Idea 3: Invest India
Issel's team recently upgraded its call on India, largely on the view that the government will be forced to make politically difficult changes to attract investment.
"At the end of 2010, the administration in India basically stopped working. You hardly got any new mining approvals, industrial projects, steel plants - investment dropped dramatically. You can argue about the reasons but I think one of them was the ministry for environment becoming more strict, and also there was a telecoms licensing scandal. [The government] did not want to be accused of any bribery so they would rather not approve anything," Issel says.
That is changing, he says, because the government is a weak coalition facing an election. To win, it needs to generate jobs. He thinks its only move now is liberalisation that will raise investment growth in the country.