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Investors are fleeing emerging markets equities en masse. We
at AllianceBernstein think they need a new playbook. Great
investments can still be found across the developing world
just not in the usual places.
Macro conditions are a lot harsher than they have been over
the past decade, when Chinas manufacturing juggernaut was
in ascendance and spreading prosperity to other developing
countries. Investors can no longer treat emerging markets as a
homogeneous bunch and should be prepared for rougher
economic cross-currents ahead.
But in our view, investors shouldnt reject these
stocks outright. Emerging markets are still home to many of the
worlds fastest-growing economies and most dynamic
companies. New and exciting opportunities are surfacing every
day. As we see it, winning in the future will depend on
identifying pockets of strength even in weak economies
and catching nascent trends before they become obvious
Our first order of business, then, is to vanquish some of
the long-held misconceptions obscuring todays
emerging-markets investment picture. Here are five
You have to predict Chinese policy to win.
Wrong. The measures that pertained to a bygone China
flatlining power, cement and steel production are
signs of an economy losing steam (see chart 1). But even under
conservative forecasts, Chinas growth is still expected
to create an economy the size of
South Korea, Canada or Spain every two to three years. It
defies logic to say that China isnt incubating vast
Many of these opportunities include burgeoning industries
catering to Chinas rising consumer class (see chart 2).
Mobile phone subscriptions, Internet shopping and online gaming
are growing robustly. Sales of chewing gum and candy are brisk,
as is spending on movies, foreign travel, sportswear and
cosmetics. Starbucks coffee shops are popping up in every major
city. We think these businesses have only scratched the surface
of their growth potential.
Its all about the commodities supercycle. Not
quite. Such cycles are born every 20 to 40 years. The
most recent one peaked in 2010. Resource-dependent economies
and industries will remain hard-pressed as pricing normalizes.
But those that consume resources
India, for one are already reaping rewards.
More to the point, emerging-markets investors need to keep
their vistas wide. The industrial-manufacturing suppliers in
Mexico, Vietnam, Poland, Hungary and the Czech Republic should
continue to gain from Chinas waning status as a source
for low-cost labor and from reviving demand from
developed-markets customers. Were also keeping an eye on
developments in Argentina. Actions by the countrys
newly elected, reform-minded government to undo the damage of
the former regimes policies have already reduced
sovereign bond spreads and improved the competitiveness of its
The aging populations of emerging Asia are also helping
certain sectors expand. For example, South Korean convenience
store operators are gaining share with their small-format
stores, which are easier for their increasingly elderly
customers to navigate.
Emerging-markets consumers are the only source of
growth. Heres why not. Shoppers in developing
economies are indeed creating big opportunities for investors.
But they arent the only game in town. Many
emerging-markets companies are making steady inroads with
developed-markets consumers. A large share of the earnings
growth of Mexican food-processing company Gruma is coming from
selling tortillas to customers in the U.S. Certain Mexican
airports have become malls with runways, profiting from a
captive customer base of big-spending foreign travelers. Yarn
spinners, fabric mills and sneaker makers in Asian emerging
markets are riding the phenomenal popularity of athleisure
sportswear in the U.S. and Europe.
A stronger U.S. dollar is bad for all
emerging-markets companies. Not exactly right. The
strong greenback is a boost for developing-world companies
selling mostly locally made products to global markets.
Brazilian jet maker Embraer and pulp-and-paper producers Suzano
Papel e Celulose, also based in Brazil, and Sappi, based in
South Africa, are in this category.
The best way to access EM growth is to invest in
EM-domiciled companies. Not always. Sometimes the
developed-markets parent of a developing-markets subsidiary
offers investors a more attractive entry into a lucrative
emerging-markets business. For example, Suzuki Motor Corp. may
look more attractively valued than its Indian subsidiary,
Maruti Suzuki India a key profit driver for
playing auto sales growth in emerging markets. Similarly,
owning parent company
Anheuser-Busch InBev may be a better deal than owning its
Brazilian subsidiary, Ambev. In addition to a stake in Ambev,
Anheuser-Busch InBev gets you a dominant position in Mexico, a
fast-growing profit stream from China and the worlds
leading premium beer portfolio.