Emerging markets are becoming a more important component of the global economy, and this trend is likely to continue given their low debt levels relative to developed countries, youthful and growing population and access to raw materials.
I think this phenomenon is something that is well documented, but there are various ways to play this theme. Firstly, the most obvious choice is to invest directly in Emerging Market Equities or an Emerging Market fund. However, these can often exhibit high volatility, and access and liquidity may also be an issue. There are however many developed market listed companies that generate a significant proportion of their revenues from Emerging Markets.
Unilever is a supplier of fast moving consumer goods, their products are grouped into four principle areas: Personal Care, Homecare, Foods and Refreshments. Products range from Lynx deodorant to Ben and Jerry's ice cream. This company particularly has potential for further rapid growth in emerging markets as demand for more consumer goods increase in line with a higher standard of living. Unilever operates in Asia, Africa, Central and Eastern Europe, the Americas and Western Europe. The share has exhibited steady gains over the past five years, returning 61.50% with a yield of just under 3% per annum.
SABMiller Plc is another company that has great potential to take further advantage of the expanding emerging markets. They are a holding company that has brewing and beverage interests across six continents. The company is engaged in the manufacture, distribution and sale of beverages. As of last year they had over 200 brands of beer in 75 countries, such brands include Peroni, Pilsner and Grolsh. Their soft drink business is also expanding, they are the world's largest bottler of Coca-Cola (KO). With such a wide range of products and global reach, this company has been an attractive investment over the long term. Over the past 5 years alone it has returned 202% with little sign of slowing down.
SABMiller contributes to the wellbeing of communities around the world and as such has had much success in entering new and emerging markets. The Asia Pacific region was their biggest area of growth last year as earnings before tax increased 265%. The stock has seen a great start to the year returning little over 19%.
With emerging markets (and the global population in general) increasing in size there is going to be more demand for food. This is amplified by the changing dietary habits of many Emerging Market countries which are shifting to a more protein based diet. So what does this mean? Well farmers are incentivized to maximise crop yields as prices are high. This means they will invest in the best quality seeds, fertilizers and machinery in order to achieve this. Agriculture related companies such as Monsanto Co (MON), producer of biotech products such as herbicides, and Deere & Co (DE), a farming equipment producer, have potential to expand on the back of global demand for more mature food sources increasing.
Whilst performance has been fairly gradual for Monsanto, it has great potential to expand as the leading company for agricultural related biotech products. Its two business segments, Seeds and Genomics, allow farmers to produce more resilient, higher yielding crops, thus reducing the overall costs for farmers. In 2010, the company acquired a corn and soybean processing plant in Chile, and this has broken into the Latin American market. With a global demand that is ever increasing, it has the potential to be a great long term holding. First quarter profits rose to $2.78 a share, up on $2.28 the year before, and has returned 12% year to date.
Another agricultural related company with a global reach is Deere & Co.; many would recognize their green tractors anywhere. Their business spans a number of areas: agriculture and turf, construction and forestry and financial services. The first part manufactures and distributes turf and agriculture equipment and service parts, the second is involved in the manufacture and distribution of construction vehicles ranging from log loaders to dump trucks. Its financial services business is involved in leasing new and used products.
The company operates globally with exposure to emerging markets such as Africa, South America and Asia. They have been managing their debt levels much more efficiently over the past year and on the back of this saw impressive earnings per share growth and increasing net income. Year to date performance has been a little subdued, only returning 1%, however as they continue to operate I expect modest share growth to come.
As Emerging Markets grow, their need for better amenities and infrastructure will also grow. Currently many areas are without electricity and temporary generators are required - Aggreko (AGK) is the largest generator maker globally and is seeing impressive sales. Also, JCB (JCB) announced strong demand for their vehicles (diggers) as construction ahead of the Rio Olympics is well underway (read more on infrastructure investments).
After some good results recently, it is evident demand in emerging markets are on the up and up.
Note: Charts and financial data has been sourced from Google Finance.