EM growth with less risk
WESTERN-LISTED FIRMS WITH EASTERN EXPOSURE
Investors have heard the case made for emerging markets many times. They offer muchhigher growth t han developed markets, and therefore very compelling return prospects.
But what may often be overlooked is that a company’s revenue stream does not necessarily come from the country in which it is based.
For Greg Placidi, seni or portfolio manager at Excel Investment Counsel, that’s the strategy behind the Excel Blue Chip Equity Fund.
The portfolio of 30 to 40 companies focuses on highquality multinationals that are domiciled in developed countries, but get a meaningful portion of their revenue from higher- growth emerging markets.
“I like to call it the tale of two economies,” Placidi said. “North America, Europe and Japan will be lucky to get two-per-cent average growth in the next few years. On the other side of the coin, emerging markets should average five per cent or higher as a group.”
Targeting companies with leading brands with deep moats, Stryker Corp. ( STK/
NYSE) is one portfolio holding that benefits from the stability of developed markets and the potential growth kick from emerging markets.
As a leading global med- ical technology company, Stryker has the No. 1 market share in medical instruments, ranks second in trauma, and third in knee and hip replacement.
While the company has successfully built out a massive franchise, its 2013 acquisition of China’s Trauson Holdings marked a recognition of the need to expand outside of developed countries.
“They realized they couldn’ t greenfield i nto China, and needed to buy an established player with leading market share,” Placidi.
He also highlighted China’s aging population, rapid gains in health- care consumption as the middle class gets more wealthy, and the government spending more money in this area.
That purchase gave Stryker a premier brand around the world in both developed and emerging markets, with the Chinese brand representing a lessexpensive alternative. The company has also passed an FDA audit with its Chinese products so they can be sold in the U.S.
“If the U.S. election brings on issues about health- care costs, they’ve got the ability to supply both the upper and lower ends of the market,” Placidi said.
Middle- class consumption in emerging markets is forecast to climb above US$ 50 trillion by about 2030, from just US$5 trillion today, so the companies that can take advantage will be big winners.
Another fund holding, Starbucks Corp. ( SBUX/ NASDAQ) fits the mould of having a deep moat with its strong U. S. presence, and its growing store base in Europe.
But the company’s most compelling growth is coming from the emerging markets, as stores in China are planned to rise from 1,000 to 3,400 in the next four years or so.
Placidi also highlighted Starbucks’ opportunity in India, where it currently has less than 100 locations, but is revamping its model to target different tastes, such as the popularity of tea.
“If they can get even reasonable penetration into the world’s second-largest population over the next 10 years, that is still nice growth.”
Playtech PLC ( PTEC/ LON) is based in the U.K. and gets about 40 per cent of its revenue from the Philippines, but serves an industry that is heavily dependent on the Chinese market.
“It’s defined by a lot of analysts as an online gaming company, but I have a bit of a problem with that,” Placidi said. “That suggests they are taking some sort of underlying risk with the bets.”
Instead, he explains that Playtech provides an online platform casinos use to serve their customers.
The company boasts revenue growth of approximately 35 per cent annually for the past five years, and margins at around 40 per cent of EBITDA.
“Everyone wants to be connected 24/ 7 r egardless of where they are, and when you look at sales of smartphones and tablets, the vast majority of growth is happening in the emerging markets,” Placidi said. “But people aren’t buying smartphones in the emerging markets to make phone calls, they are buying them in order get to Facebook, WeChat and online gaming.”
He describes PlayTech as toll- booth- like, because the company doesn’t care who is using the platform as long as more people are licensing the software.
I LIKE TO CALL IT THE TALE OF TWO ECONOMIES.