Emerging Markets: A Useful BRIC In Your Portfolio

11/5/2012


With Europe a mess, the U.S. moving in low gear, and interest rates languishing near historic lows, investors face a conundrum: Where to deploy their cash? In such an environment, many turn to emerging markets.

In recent years, investors have gotten burned taking on that extra risk. Emerging-market equities have lagged the S&P 500 Index by a wide margin. For instance, the S&P BRIC 40 Index, which includes companies based in Brazil, Russia, India, and China, has slumped 14% in the past two years, while the S&P 500 jumped 19%. 

With growth in many emerging markets projected to decelerate, investors might seem even less inclined to accept the volatile returns. But the rally in U.S. stocks could be showing signs of fatigue. With more than half of S&P 500 companies already posting third-quarter results, per-share profits for the index appear headed for their first decline since 2009. And profit estimates for upcoming quarters continue to shrink.

Even foreign investors are shying away from Western companies. In the first half of 2012, foreign direct investment — including mergers, acquisitions, and capital investment — declined 8% to $668 billion, according to the United Nations Conference on Trade and Development. We can blame much of that decline on weakness in the U.S. and the euro zone.

However, emerging markets attracted half of all foreign direct investment during the six-month period, a record high. China held up relatively well, down just 3% to $59.1 billion, surpassing the $57.4 billion pumped into the U.S., which plunged 39%. Foreign investment rose 8% in Latin America and 5% in Africa.

Investors seem to be looking past the poor stock returns and focusing on the growth potential of emerging markets. Yes, economic growth is slowing in some areas, but in most emerging regions growth remains well above levels seen in developed markets.

So how should you, as an investor, tap into that growth? Rather than riding the fortunes of a single foreign country or region, we advise a diversified approach. One option is the Vanguard Emerging Markets Stock Index ($26; VEIEX), up 9% so far this year. The fund focuses on large-cap companies, including Samsung Electronics, telecoms China Mobile ($55; CHL) and America Movil ($25; AMOV), and Russian oil giant Gazprom ($9; OGZPY).

Investors seeking a less-direct — and less-volatile — way to gain exposure to emerging markets could buy shares of companies building their presence overseas. Emerging markets still account for little more than a rounding error on many income statements. But plenty of U.S. companies have established brands and discovered lucrative sales channels overseas, while plenty more are working to find their own niches. Below, we show steps taken by 14 of our recommended stocks to tap into emerging-market growth. Three of these companies are reviewed below.

Companies already established in emerging markets . . .
Below, we look at how emerging markets affected sales for some of our recommended companies in the latest fiscal year.
Company (Price; Ticker)
Foreign
Sales As
% Of
Total
Exposure To Emerging Markets
Apple
($593; AAPL)
61
Apple grew sales in China (15% of total revenue in fiscal 2012) about 78% for the year.

Chevron
($110; CVX) *

* Production revenue only.

72
About 26% of sales came from Africa and 28% from Asia. South America accounts for just 4% of production but more than 10% of undeveloped acreage.
Cisco
($17; CSCO)
42
Emerging markets account for about 20% of Cisco's business. Cisco plans to invest $550 million in Brazil over the next four years as the country prepares for the 2016 Olympics.
DirecTV
($51; DTV)
18
Brazil accounts for 11% of sales, with the rest of Latin America (including Argentina, Chile, Columbia, Ecuador, Venezuela, the Caribbean, and Puerto Rico) generating another 7%.
Exxon Mobil
($91; XOM)
68
Exxon draws 3% of revenue from Singapore, where sales have climbed at least 30% in the past two years. The company has other huge operations in Asia, Africa, and Latin America.
Intel ($22; INTC)
84
Taiwan sales (32% of total revenue) have surged  61% since 2009, while sales in China (15%) have climbed 39%. The October 2010 opening of Intel's first plant in China helped drive growth.
Qualcomm
($59; QCOM)
94
Sales jumped 49% in China (32% of total sales) and 88% in Taiwan (17%) during fiscal 2011 ended September. Qualcomm has also partnered with local phone carriers to build a fourth-generation network in India. 
Thermo Fisher
($61; TMO)
47
Sales in China (5%) grew at more than twice the rate of any other geographic market in 2011.
Wal-Mart
($75; WMT)
28
Wal-Mart operates 21% of its retail stores, wholesale warehouses, and restaurants in Mexico, along with 6% in Central America, 5% in Brazil, 4% in China, and 3% in Africa.
. . . and those just getting started
Abbott Labs
($66; ABT)
59
A pair of 2010 acquisitions, valued at nearly $10 billion, expanded Abbott's presence in Eastern Europe and India. Abbott holds a leading 7% share of the Indian market for branded generics.
Alliance Data
($143; ADS)
29
Alliance Data plans to accelerate the rollout of its loyalty program in Brazil, expanding into markets that contain 25% of the population by the end of 2012. Alliance Data also owns 26% of an India-based analytics company.
J.P. Morgan
($42; JPM)
NA
In the past three years, J.P. Morgan has bought a majority stake in a Brazilian hedge fund, launched banking services in South Africa, and begun underwriting stocks and bonds in China. 
Macy's
($38; M)
NA
Macy's paid $15 million for an equity stake in a Chinese e-commerce company in May.

UnitedHealth ($56; UNH)

NA Not available.

NA
In October, UnitedHealth agreed to buy a 90% stake in Brazil's biggest health insurer, Amil Participacoes, in a $4.9 billion deal.

The world's largest supplier of networking equipment, Cisco Systems ($17; CSCO), is highly correlated to global growth. That means a slowdown in spending on technology equipment — clearly evident in September-quarter results of other big tech companies — could pressure Cisco. Total orders rose 2% in Cisco's July quarter but surged 12% in emerging markets in Europe, Africa, and the Middle East. In particular, Cisco has focused on Brazil, which plans to spend $11.3 billion on the 2014 World Cup and $14.4 billion on the 2016 Olympics. That kind of spending should open doors for Cisco, a Buy and a Long-Term Buy.


With U.S. regulators clamping down on banking activities, J.P. Morgan Chase ($42; JPM) looks to other regions for growth. CEO Jamie Dimon sees banking growth up to three times faster in emerging markets than in the U.S. and Europe. In January 2011, J.P. Morgan won approval to underwrite stocks and bonds in mainland China through minority stakes in joint ventures with local partners. Since then, J.P. Morgan has tapped a rich pipeline of companies seeking to go public or issue bonds. J.P. Morgan Chase is a Long-Term Buy.


U.S. companies first came to emerging markets for natural resources, then returned for the inexpensive labor. And today they sell consumer products to a growing middle class. For this third act, Wal-Mart Stores ($75; WMT) stands ahead of the curve, with nearly as many stores in emerging markets as in the U.S. The retail giant's next big move could be India, which has eased regulations on foreign retailers. Wal-Mart already operates 17 outlets in India that sell strictly to other businesses, and it could launch retail stores in the next year or two. Wal-Mart is a Long-Term Buy.

 

 


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