By Jim Hamel
Slowing growth expectations in emerging markets have spurred concerns about the availability of interesting investing opportunities in these areas. In our view, the trend of rising emerging world consumerism is a powerful secular trend, likely to continue yielding compelling profit growth—for well positioned franchises.
Tempered EM growth expectations appear to be largely a function of lower anticipated government spending as these countries continue deleveraging (in aggregate, though not uniformly) following the 2008 credit crisis rather than a reflection of weaker consumption trends.
Emerging markets in aggregate are still estimated to grow at nearly double the pace of the developed world over the next five years, supported by brisk consumer spending. In fact, over the next 20 years, EM consumer spending is anticipated to grow to $30trn annually—representing nearly half of all global spending.
One factor contributing to fast EM spending growth has been the rise of mobile computing, which is reordering the way we consume. The proliferation of powerful hand-held devices is putting the Internet into the hands of new consumers, often for the first time. And there is still tremendous room for growth, as smartphone penetration in these areas remains low.
A material challenge for bricks-and-mortar firms selling into emerging markets can be a lack of infrastructure. However, the ability to tap consumers online can turn a lack of infrastructure into a competitive moat. Firms with solid, trusted e-commerce platforms can, in effect, “skip a step” in normal business development—often launching faster with lower capital intensity, improving free cash flow generation and increasing the potential for wider profit margins.
We believe there are a number of ways firms can benefit from rising emerging world consumption. One approach to finding firms well positioned to benefit is to look for those that may have first-mover advantages that can be levered into scale and network advantages. Also, those that have invested ahead of the curve to develop a thoughtful mobile strategy—whether retail, content or both—to support ongoing monetisation growth.
For example Tencent, China’s leading internet-based social and gaming platform, has acquired users in demographics attractive to online advertisers by offering engaging content and social-network services. Tencent is in the early phases of monetizing the approximately 25% of Chinese mobile internet time that is spent on their online properties. The firm is also diversifying its revenue with the integration of its messaging platform WeChat and growing a mobile ecosystem that includes partnerships with key e-tailers.
A compelling product offering can also be a significant competitive advantage, particularly if it includes sought-after global brands—those perceived to be higher quality. This is Amorepacific’s strategy—Korea’s largest cosmetics retailer. Amorepacific enjoys elevated brand status in the region, giving it pricing power and what we view as attractive gross margins, which it is now leveraging into other markets via specialty stores and a growing online platform. (All companies mentioned are holdings in our Global Opportunities portfolio.)
Another approach is a focus on leveraging significant scale advantages—which has allowed Brazil’s largest retail drugstore chain Raia Drogasil to become a top consolidator in a fragmented market. It has also yielded increased purchasing power and working capital, improved distribution and wider brand awareness in what we believe is a still under-penetrated market.
Emerging markets companies can often feature higher growth rates—which can raise questions about sustainability. In our view, higher growth rates may be justified for quality franchises, when considering their business models may be more asset-light and free cash flow generative, with the potential to rapidly increase share in underpenetrated markets.
Jim Hamel is portfolio manager in Artisan Partners’ Growth Team
Comments