Locally-focused emerging market equities have been less volatile and produced better returns than multinational stocks, a new study has found.
Research by fund manager Neuberger Berman showed emerging market-focused firms generated returns of 93 per cent in the five years to December 2010, while global companies rallied 77 per cent.
Emerging market companies with a local focus also outperformed during the global financial crisis at lower levels of volatility than their globally-oriented peers and also participated comparably in the rebound from March 2009, it said.
“We found that the locally-oriented companies are likely to enjoy superior growth rates, while trading at a slight premium in terms of price/earnings ratio, to those focused on global markets,” Neuberger Berman emerging markets portfolio manager Conrad Saldanha said.
“Locally-focused firms offer more attractive appreciation potential given their exposure to growth in consumer and corporate spending and we believe they represent an attractive investment opportunity.
“We therefore believe locally-focused firms have the potential to outperform those that focus on exporting to global markets.
“Furthermore, the smaller-cap companies held up well in the downturn and outperformed during the recovery. This counters the traditional view that small-cap companies are a higher-risk investment option.”
He said globally-focused firms did have certain attractions for investors – for instance, more diversified revenue streams and greater access to capital markets.
“But they also face more challenges to growth and, in many instances in emerging markets, have a high level of government ownership, which may impact on their attractiveness to investors,” he said.
Locally-focused companies include consumer product firms along with domestic industrial and healthcare businesses. Globally-focused companies include energy and material firms that sell commodities to a worldwide marketplace, according to Neuberger Berman.
