Emerging markets can provide an exciting opportunity for long-term, demographic-driven growth, but opportunities must be balanced with the potential risks to deliver longstanding investment opportunities, writes Henderson Global Investors’ Glen Finegan.
The fast pace of change in emerging markets can present compelling investment opportunities.
While companies associated with emerging markets are expected to deliver relatively higher levels of growth, the nature of these economies brings specific challenges and potentially higher risk, and a long-term, risk-aware approach is required.
Given the often weak rule of law in many of these markets, it is essential to invest alongside controlling shareholders and managers that have a record of integrity and treat their minority shareholders fairly.
The market also tends to underestimate how often non-financial risks become real financial losses, particularly in economies with relatively immature legal and political systems.
By looking to understand these risks to investors, our research is uncovering a growing number of companies that exhibit a good record of corporate governance, along with strong environmental and social standards.
Strong governance speaks volumes for a company’s risk profile and increases the likelihood that they will do reasonably well, purely due to the demographic-effect of emerging markets.
You can tell a lot by looking at the quality of the owners and how they treat all of the stakeholders in their businesses.
One such example is Fuyao, a well-governed Chinese car glass manufacturer, building a global business.
Fuyao's founder and chairman Cao Dewang has not only built an impressive company, but is also a trailblazer in China's charitable sector, having donated a significant share of the company to a foundation.
Companies we favour tend to have long-term owners whose wealth is invested in the same equity that is available to third-party investors; this provides comfort that our interests are aligned.
Investors should also search in less popular places for companies that are perhaps facing short-term headwinds, as these are more likely to be reasonably priced.
In India, we have shied away from high-quality but richly-valued consumer companies. The cement sector may provide an alternative and less expensive way of capturing the rise of India's middle class.
Per capita consumption of cement is low and home improvements are a common use of savings in India.
With the backing of the Birla family, UltraTech Cement likely will continue to take a leading role in the consolidation of India's fragmented and overly indebted cement industry.
Chairman Kumar Mangalam Birla is also recognised as a leading advocate for strong corporate governance in India.
Blurring boundaries between emerging and developed market opportunities means we do not analyse either in isolation.
As a result, Henderson invests in some multinationals listed in the developed world but with greater than 50 per cent economic exposure to emerging markets.
Companies owned include PZ Cussons, the consumer-goods group based in Manchester that was founded in Sierra Leone in 1884.
PZ has brands established in Africa, as well as countries such as Indonesia and Thailand.
Elsewhere, less established frontier markets are also broadening the company’s investment opportunity set.
After a prolonged period of poor stock and currency market performance, attractive valuations can be found on many good quality African businesses.
GT Bank of Nigeria, for example, has the most conservative record of the local Nigerian banks and trades close to its book value despite generating a high return on assets and offering a generous dividend yield.
The long-term potential for asset growth in West Africa is likely to be substantial.
With six billion of the world’s seven billion people living in emerging markets, they are going to be a much bigger part of the global economy going forward.
Rather than ignore emerging markets, we believe a long-term, risk-aware investment approach could provide investors with exposure to massive demographic-driven growth opportunities.
Glen Finegan is head of emerging markets equities at Henderson Global Investors.
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