Investing in high quality companies in emerging markets gives best opportunity for investment returns, F&C’s Jeff Chowdhry says
F&C head of emerging market equities considers that investing in high quality companies in emerging markets gives investors the best opportunity to generate superior investment returns.
“The increasing importance of the emerging economies from a global perspective is illustrated in figures released by the IMF in April showing that they are expected to contribute over 80% of global growth in 2013.
“At the same time the IMF expects to see the emerging economies pass the advanced economies in terms of their share of world GDP. These growth trends are likely to continue, underpinned by the positive fundamental attributes of the emerging economies compared to the developed world: better demographics (younger populations), lower levels of domestic and sovereign debt, and a growing middle class driving domestic consumption.
“As a result, we believe that a strategy of investing in high quality companies in emerging markets gives investors the best opportunity to generate superior investment returns.
“We would argue that the strategy is even more appropriate for emerging markets than developed markets. For example, many emerging economies have fast-growing consumer markets and developing infrastructure needs that will provide an attractive backdrop for high quality companies to grow their businesses at exceptional rates over the long-term which will result in superior shareholder returns.
“Furthermore, the inherent lower volatility in these earnings streams should mitigate some of the additional risk associated with emerging market investing.”
The effectiveness of this strategy is illustrated by looking at the performance of some high quality companies over time:
• HDFC Bank: The second largest private sector bank in India, providing consumer and corporate loans in India. Their strong brand, deposit franchise and risk management systems give them a significant competitive advantage. They have an outstanding track record of profitability and growth. Over the past 10 years, this investment has generated a total shareholder return of 30% p.a.
• Ultrapar: A Brazilian gas distribution business which benefits from increased vehicle penetration in Brazil, is taking share from the informal market and the business is resilient during economic downturns. Increased scale has translated into growing margins and improving profitability whilst the balance sheet is healthy. Over the past 10 years, this investment has generated a total shareholder return of 30% p.a.
• LG Household & Healthcare: A consumer products company in South Korea, with leading positions in household goods, beverages and cosmetics. They have a proven ability to profitably grow the business by introducing new products and acquiring underperforming businesses that they subsequently turn around. Over the past 10 years, this investment has generated a total shareholder return of 35% p.a.