‘Global gorillas’ are new stock portfolio kings
Multinational giants tame the wilds of emerging markets
new
Jan. 18, 2013, 9:32 a.m. EST
By Rachel Koning Beals
Associated Press
CHICAGO (MarketWatch) — Large multinationals offer an investment avenue
to emerging markets that proponents argue has staying power for years to
come.
These companies are the world’s “global gorillas,” beating their chest
for investor attention that’s been distracted by developed world
problems at the expense of emerging market opportunities.
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These behemoths boast all-weather management skills and sizable
workforces. But don’t limit yourself to companies with
established-market footholds, longevity and time-tested brands — or even
the M&A flurry that’s taken over global consumer giants.
This emerging-market theme is about being nimble despite girth. It’s
about reach, a willingness to look beyond China, India and Brazil
(although not to ignore them) to Vietnam, Malaysia, the Philippines, and
parts of Africa where cappuccino-craving and smart phone-dialing
consumers are queuing up, or will be soon enough.
Destinations operating below this level of consumerism first need
infrastructure, food innovation, and mobile bandwidth. In other words,
more potential stock opportunities.
“It’s the end of the world as we know it, but certainly not the end of
the world. We’re in a new world that encompasses globalization, changing
demographics, and technology,” said David Darst, Morgan Stanley Wealth
Management’s chief investment strategist.
“So ride the demographic wind. Let it push you rather than fight you.”
Darst and his Morgan Stanley Smith Barney colleagues put “global
gorillas” on their 2013 list of trends to watch, in part because
emerging markets are expected to generate about 80% of global growth
this year, he said.
Maps and goals
For sure, some companies are loosening the fiscal belt. Their pain
period is over and they’re thinking growth again. That’s exciting. But
don’t go wild over growth without applying the same sniff test you’d
give any big company. Is management sound? If the company pays a
dividend, is there yield growth? That’s why select stock picking among
the healthiest multinationals can offset global economic uncertainty.
Below are a handful of themes and investment ideas that might coax you
out of the monkey house and into the wild with the global gorillas. Mind
the risks, too.
Few surprises here. The global gorillas are essentially the S&P
Global 100 Index and the best way for individual investor exposure is
iShares S&P Global 100 ETF
IOO
-0.11%
. The index does give greater weight to energy and financials. Some of its biggest holdings include: Exxon Mobil Corp.
XOM
+0.67%
, General Electric Co.
GE
+3.47%
, and U.S.-listed shares of Nestlé S.A.
NSRGY
-0.37%
and HSBC Holdings PLC
HBC
-0.11%
. Vanguard’s Total World Stock Index ETF
VT
+0.10%
competes in the same space.
Some big companies are already putting more resources in the emerging
corners of the globe, where population and growth are beckoning. German
cement-maker Putzmeister Holding, for example, has closed its Southern
European plants and is building plants in Turkey and Brazil. And last
year, Mondelez International Inc.
MDLZ
+0.09%
, formerly part of Kraft, bought U.K.’s Cadbury for, among other
reasons, that multinational’s reach in many former British colonies.
Some global gorillas are moving to capture emerging healthier
lifestyles. Nestlé, for example, has boosted its food portfolio with
traditional fare but last year acquired Pfizer Inc.’s nutrition business
in a bet on a better-eating world.
Technology of course is one of the global themes few can argue against.
As competition heats up for lower-cost smartphones, therein lies
opportunity for both manufacturers and stock investors. For instance,
Samsung, in pricing its smartphone below that of Apple Inc.
AAPL
-0.53%
and other rivals, may easily find loyalty among emerging market buyers
whose incomes are rising but not on levels matching the developed world.
That’s one example of nimble product variety and competitive pricing
that will prove key to gaining market share in these still fledgling
consumer markets.
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‘Emerging market-lite’
Of course, there’s the downside.
Emerging-market growth is a long-term story, and as an investment may
not be for those with weak constitutions or especially short-term
horizons.
Investing in developing countries through multinationals is also a tack
that some may call “emerging market-lite” — not really offering pure
diversification away from developing markets.
China is also an unknown. As China transforms into a developed market,
its relationship with Japan and other Asian neighbors will significantly
impact the economic health of the emerging region. There’s room for
improvement.
Multinationals also face tax challenges to their operations. Europe and
Australian lawmakers, for example, are working to toughen the tax
collection for U.S. multinationals selling goods and services in these
locales.
As more markets open to products from abroad, it becomes more difficult
to determine the tax liability of multinational companies. International
agreements generally state that commerce should be taxed in the
physical location where profit-making activity occurs, not necessarily
where a customer lives or where a transaction takes place. Add dozens of
emerging markets in the mix and this gets more complicated.
Emerging markets landed on other 2013 lists, including that of political
consultancy Eurasia Group’s Ian Bremmer, who ranks these regions as one
of his biggest risks investors face this year. He says investors may be
so hungry for a good growth story they’re not giving enough credence to
unequal political stability of emerging countries. He urges due
diligence country-by-country rather than regional analysis.
Moreover, is the global economy really in the clear? Many European and
U.S. companies are still deleveraging from the credit crisis of 2008.
Central banks will wean consumers off ultra-loose monetary policy over
the coming few years, potentially taming widespread global demand.
“If you don’t like energy or financials this year, a play on the S&P
Global 100 might underperform,” Darst says. “But if you believe like I
do that geopolitics is shifting to ‘geonomics,’ and that means developed
countries have no choice but to support global (company) champions
expanding in emerging markets, then you’re really getting some long-term
prospects here.”
Rachel Koning Beals is a Chicago-based freelance writer.
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