The fast pace of change in emerging markets can present compelling investment opportunities. It also brings additional levels of risk. While companies that generate their revenues from emerging markets are expected to deliver relatively higher levels of growth, the nature of these economies brings specific challenges and potentially higher levels of market volatility. This, in our view, calls for a particular approach.
Integrity
We believe 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 that treat their minority shareholders fairly. We also believe the market tends to underestimate how often non-financial risks become real financial losses, particularly in economies with 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. One such example is Fuyao, a well-governed Chinese car glass manufacturer building a global business. Fuyao’s founder chairman has not only built an impressive company, but is also a trail blazer in China’s charitable sector and donated a significant share of the company to a foundation.
Family controlled
Companies we favour tend to have long-term owners whose wealth is invested in the same equity as that available to third party investors. This provides comfort that our interests are aligned. We also often prefer to search in less popular places for companies that are perhaps facing short-term headwinds and, therefore, are more likely to be reasonably priced.
Middle class rise
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, we believe UltraTech Cement 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.
Growing opportunities
Blurring boundaries between emerging and developed market opportunities means we do not analyse either in isolation. As a result, we invest in some multinationals listed in the developed world but with greater than 50% 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, frontier markets, which are less established than emerging economies, are also broadening our investment opportunity set. After a prolonged period of poor stock and currency market performance, we find attractive valuations 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. In our view, the long-term potential for asset growth in West Africa is substantial.
Stock examples are included for illustrative purposes only and are not recommendations to buy or sell.
Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
For Professional Investors only. The information in this article does not qualify as an investment recommendation.
Issued by Henderson Global Investors. Henderson Global Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Fund Management Limited (reg. no. 2607112), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services.
