A way to invest in emerging markets is to focus on companies that are growing rapidly, have sustainable business models, and are industry leaders
Seek profit from strong economies in emerging markets, where demographics and government policies are driving impressive growth. That's advice barely dented by the recession and financial crisis. But this wisdom comes with caveats: These markets are particularly subject to currency swings, overheating, and unexpected shocks. And it doesn't take a bombshell of Dubai World dimensions. In October, Brazil levied a 2% tax on foreign investments in its financial markets, saying it wanted to prevent currency appreciation. The tax caused foreign investor participation on Brazil's exchange to fall to 29.5% in November, vs. 33.7% in October, says Deutsche Bank (DB) analyst Mario Pierry.
For the brave, there are plenty of ways to get in on the action. Consider Western consumer products companies, such as Cadbury (CBY), which gets a third of its confection sales from developing nations. Some investors seek out commodity producers or technology and health-care companies that cater to the developing world's expanding middle class. Then there are the emerging markets' own success stories—companies growing faster than their dynamic domestic economies.
Bloomberg BusinessWeek asked international investing experts to recommend companies likely to join the ranks of global blue chips over the next five years. The challenge was to identify companies that are growing rapidly, have sustainable business models, and are large enough to contend for dominance of their industries.
Buying shares may not be so easy: Of our experts' picks, only Wipro Technologies (WIT), the Indian conglomerate, is listed on a major U.S. exchange. Some discount brokerages provide access to foreign markets in Europe and Japan, but stocks in countries such as Brazil can be harder to buy, making a full-service brokerage the best bet.
Brazil is likely to be home to a few new global giants. But rather than guess who will prosper, bet on the company's exchange. BM&F Bovespa, a favorite of Richard Parower, manager of Seligman Investments' Global Technology Fund, is the country's only major financial exchange, offering investors a way to profit from Brazil's growth—gross domestic product is expected to jump 4.75% in 2010. The exchange is in talks with Chile, Colombia, and Mexico for cross-listing of shares. "They're positioning themselves to become the stock exchange for Latin and South America," Parower says. In October, Bovespa's stock trading volume hit a record $4.2 billion a day, up 38% from the year before, while fixed-income and derivatives volumes rose 12.5%.
The exchange has teamed up with CME Group (CME), the world's largest futures and options exchange, and Nasdaq. It's also investing in technology to build a world-class trading platform. Says Adam Sussman, director of research at TABB Group, a capital markets advisory firm in Westborough, Mass.: "The faster they are, the more efficient their market will be [and] the more capital they attract." The value of the exchange's new share offering tripled from the first to the second half of 2009. Next year, analysts expect revenues to grow 26.5%, to $1.1 billion. The exchange's stock, at 6.89, is up 101% for the year.
A big risk to BM&F Bovespa's stock is the possibility that the Brazilian economy and markets may overheat, creating an asset bubble that could cause the government to intervene.
India's Wipro is another emerging-market company that is showing impressive growth. Sales have more than doubled since 2006. Like many Indian conglomerates, Bangalore-based Wipro boasts a mind-boggling range of businesses: truck parts, deodorant, and energy consulting, for starters. But Wipro is best known for its information-technology business, which makes up 88% of its $5 billion in sales and has many Western companies as clients, including Microsoft (MSFT) and BP (BP). Revenues grew 11.8% in 2009, slower than its previous 30%-plus pace. Analysts expect revenue to reach $7.3 billion by 2012. Wipro's stock is up 148% in the past year, to 20.12.
Seeking to roll out more sophisticated services and products to its technology clients, Wipro has made nine acquisitions since mid-2007. In April it bought Nokia's (NOK) mobile broadcast unit for $127 million, enhancing its ability to develop mobile information technology applications for telecom clients. So far, Wipro has managed to keep its profit margins high, at 31.5%. But that could be difficult to maintain as it makes acquisitions in more expensive parts of the globe. "They've been pretty careful," says Moshe Katri, an analyst at New York investment bank Cowen, noting that the company favors smaller acquisitions, which allow it to keep most operations in low-cost countries.
Not all the companies benefiting from growth in emerging markets call those markets home. France's Danone, specializing in water, dairy products, and baby formula, has moved aggressively into two to three new countries each year. "Danone is gaining a lot of market share in emerging markets, where people view a foreign brand name as very attractive," says Virginie Maisonneuve, head of global equities at Schroders Investment Management, which owns Danone stock. Sales in Europe rose 4.1% in the last year, but in Asia and the rest of the world they increased more than 10%. In China, Danone boosted the market share of its dairy business by 15.7 percentage points last year. It also got into a dispute with partner Hangzhou Wahaha Group and exited the joint venture. Its stock is up 2% in the past year, to 60.40.
Danone's sales and market share have expanded partly because the company has been able to lower prices while preserving profit margins. In some cases, that meant adjusting the size of its packaging; in others, the company launched new marketing campaigns. Danone's products in development are geared toward emerging markets, including a line of fortified food products designed to give poor people the nutrients they often miss.
While heavily dependent on sales in their home country of Japan, Brewer Kirin and privately held beverage company Suntory are beginning to pursue a global strategy similar to Danone's. They're also working on a merger, with approval expected in early 2010. According to Euromonitor International, a London market research firm, their combined sales could exceed $41 billion, more than that of Coca-Cola (KO). The merged company could cut costs while sharing an increasingly large distribution network, says Hope Lee, a Euromonitor analyst. Kirin's stock is up 19.1% in the past year, to 15.63.
Taking advantage of the strong yen, both companies are on buying sprees. According to Bloomberg data, Kirin bought more overseas assets than any other Japanese company in the first 11 months of 2009, spending a total of $4.6 billion for Australian brewer Lion Nathan and for a stake in the Philippines' San Miguel Brewery. On Oct. 26, Kirin said it wanted to get 30% of sales and profits from outside Japan—mostly China and the Pacific Rim—by 2015. Less than two months later, Kirin boosted its stake in a Chinese soda venture, Shanghai Jin Jiang Kirin Beverage, to 93% from 57.7%.
Suntory, meanwhile, has made seven acquisitions in the past two years, with recent targets in Australia, Thailand, and Austria. In December it bought 70% of a Hong Kong-based wine importer, ASC Fine Wines Holding. "This is a new thing" for Japanese companies, says Euromonitor's Lee. "We don't know how their brands are going to perform in these countries."
No one can predict with any certainty how these stocks will perform in investors' portfolios, either. But with economic growth around the world outpacing that of the U.S., it may be well worth finding out.