Investors’ anxiety about all things emerging markets (EM) has moved beyond EM-listed companies to developed market companies with large economic exposures to emerging economies. What was perceived as a major strength not that long ago, i.e. exposure to faster growing emerging market economies, is now being treated as a weakness. This is particularly true of European companies, which typically have longer histories in EM than their U.S. counterparts. Therefore a larger percentage of their revenues are generated in these markets.
We think that the broad selloff we’re seeing is yet another case of the market throwing the baby out with the bathwater. Has growth slowed across emerging markets? Yes. Will there be negative repercussions for some economies as a result of the Federal Reserve’s tapering of its quantitative easing program? Yes. Have the long term growth opportunities that are available to select, well-positioned companies diminished significantly? A resounding no!
Don’t Be Distracted by the EM Noise
My colleague, Justin Leverenz, recently published a great piece explaining his views on the issues and opportunities in EM. We agree with his assessment that opportunities are biggest when controversy is loudest. Recall that emerging market countries are not homogenous: though the apparent consensus is that as the most fragile economies go, so goes the rest of EM. This view is simply not grounded in fundamental analysis, however. Environments where investors seem focused on headline macro news at the expense of individual company fundamentals have historically been fertile ground for finding exceptional companies at attractive valuations.
The rapidly growing middle class in the emerging markets, for example, continues to be a compelling story. You’ve probably heard the numbers before, but they’re worth repeating – almost 40% of the world’s population is moving to a standard of living that will allow some level of discretionary spending.1 This is a long-term tailwind for companies selling everything from milk, to toothpaste, to premium liquor to designer handbags, to luxury cars. This is a trend that should benefit companies with trusted, iconic brands and, more often than not, these brands are owned by multinational European companies.
We’ll leave it to others to put bets on China’s GDP growth, or Brazil’s next interest rate move, or whether the Indian rupee is going up or down. We prefer to stick to the time-tested strategy of identifying quality companies, benefiting from strong structural growth themes that we’re willing to invest in for the long run. And now we believe that some of those quality names have become more attractive from a valuation perspective.
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