Kathryn Langridge and Philip Ehrmann
Emerging markets (EM) have been beset this year by growing concerns over the impact of the developing trade war and the prospect of further increases in US interest rates. While it’s all too easy to become absorbed by day-to-day influences, one should remember that EM is home to well-managed companies that are benefitting from the profound structural changes taking place in their own backyards.
Battle hardened multinational corporations (MNCs) are active in many of today’s fastest-growing consumer discretionary industries and have previously been viewed as an easy way to invest in EM countries. However, the MNCs have become increasingly challenged with the emergence of “local” EM competitors, keen to capture the high growth and profits to be found in these rapidly changing areas of their economies. Significantly, we’re
beginning to see EM companies that are no longer content to compete and succeed at home and are applying their knowledge and skills to expand into developed markets.
It should be stressed that these trends are in their infancy. Indeed, to succeed, EM companies and established developed-market companies require a similar combination of factors relating to resources – financial, physical and managerial. However, EM companies often have the added advantage of learning from what has played out in the past, known as the “second mover advantage”. In addition, successful EM companies typically possess operational leverage with respect to the scale and growing marketplaces available to them, and they have fewer legacy issues relating to past capital investment and planning constraints. Many have adopted new technologies and processes more rapidly and at lower cost than their established developed-market peers; the best companies we’re meeting with now spend as much on research and development as their first world counterparts.
These trends are playing out in key global growth industries where we see attractive opportunities:
– Technology—Several Asian companies that have traditionally been low-cost component suppliers have emerged as innovation leaders in fields such as smartphones and industrial robotics. One example is Taiwan Semiconductor Manufacturing (TSMC), the world’s largest dedicated independent semiconductor foundry. The company has established itself as a pre-eminent manufacturer, as evidenced by Apple’s selection of TSMC to make the core processor chip for iPhones. It has consistently invested in leading-edge manufacturing capacity, and a strong focus on capital allocation has yielded consistently strong margins relative to those of its peers.
– Logistics & Ecommerce—Reductions in supply chain barriers across EM have increased efficiency in the movement of goods, opening new markets to potential consumers. One company driving these trends is Naspers, a South Africa-based communication, entertainment, gaming and ecommerce provider. This multinational corporation was an early investor in Tencent, China’s leading gaming and social media company, and it has built a portfolio of businesses with leading positions in classified advertising, ecommerce and gaming across Africa, India, Russia and Brazil. After a period of extensive investment, management is now focusing on achieving scale across its ecommerce businesses.
– Leisure & Tourism—Economy hotel chains have emerged in countries as diverse as Mexico, India and China, and ticketing for trains, airplanes and buses has been transformed from cash payment to online experiences using smartphones and cashless systems. One leader in this field is Ctrip, China’s leading online reservation and ticketing agency. The company has expanded into international markets as it has followed the growing numbers of Chinese tourists traveling abroad. Ctrip’s business is structurally attractive, with high barriers to entry and high returns, and the company’s profitability is beginning to approach that achieved by more mature Western peers such as US-based Priceline, with which Ctrip has a commercial partnership.
As EM investors, we view these trends as sources of compelling investment opportunities, and a growing number of EM companies are demonstrating sustainable, quality growth – in financial terms and in regard to environmental, social and governance practices. Amid the disruptive forces that are transforming EM economies today, stock selection at the company level is key.
By Kathryn Langridge and Philip Ehrmann, Senior Portfolio Managers, Manulife Asset Management