Emerging Market Stocks To Own If Protectionist Surge Continues 1
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Consumerism to drive growth in emerging markets

With the markets abuzz with words such as de-globalization, protectionism, and populism, investors are increasingly assessing domestic consumer-driven sectors and stocks for their return potential. The emerging market consumer, which holds greater promise in this regard on account of favorable demographics (see chart below), is expected to be the driving force for growth and return in these markets.

We’re seeing more and more export-dependent economies (such as Brazil and China) trying to reduce their vulnerability through diversification of exports and by promoting domestic consumer-focused industries. Consequently, we should see consumerism driving growth in these emerging markets (EEM) (VWO). Weakening global trade ties should turn investor focus to sectors that are the beneficiaries of domestic consumer-driven growth.

Which industries should see brighter days ahead?

Consumer services such as financials, media, entertainment, hospitality, and healthcare, should gain prominence here. Likewise, consumer goods; both discretionary and staples; benefit when consumer spending increases in an economy. Companies associated with the delivery or production of such services or goods are the primary beneficiaries of:

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  • A growing middle class
  • Urbanization, and/or
  • Rising disposable incomes

A quick look at the current Consumer Titans

The Dow Jones Emerging Markets Consumer Titans 30 Index measures the stock performance of 30 leading emerging market companies in the consumer goods and consumer services industries. The index recorded 18.32% in 1-year annual returns (as of March 1, 2017). In terms of country allocation, the index is currently heavy South Africa, which commands a 23.11%, followed by China, India, and Brazil at 21.03%, 14.62%, and 10.83%, respectively. Top 5 components of the index are:

  1. South Africa-based media company Naspers (NPSNY) (10.64% weight),
  2. China-based online retailer JD.com (JD) (6.01%),
  3. Brazil-based food & beverage company Ambev SA (ABEV) (5.64%),
  4. China-based travel & leisure company Ctrip.com International ADR (CTRP) (4.38%), and
  5. Mexico-based food & beverage company Fomento Economico Mexicano S.A.B. de C.V (FMX) (4.33%)
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Growth in all of the above-listed companies is a direct function of an increase in consumer spending. However, while these companies are leaders in their area and geographies of operation, market valuations for these successful companies are at levels, which may not seem very attractive to new investors. For instance, Naspers is currently trading at a 25% premium to its competitors. Ambev SA is relatively less expensive trading at a 4% premium to its competitors (at 20.3x price multiple compared to comps multiple of 19.6 times earnings).

A deep-dive in search of potential consumer titans

In this series, we’re analyzing certain emerging markets for you in the light of the macroeconomic variables currently in play there. We’ve looked at specific variables that are expected to benefit particular sectors or industries. We’ve also performed deep-dives into these markets’ stock exchange index components to identify where an opportunity lies; that is, companies from the consumer sector that offer the most attractive valuations.

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