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Navigating the Emerging Markets Of Today

By : Ziad K. Abdelnour | 10 August 2015
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As we at Blackhawk Partners see it today, one of the biggest advantages emerging markets have offered investors is a strong growth story

Over the past decade, growth in emerging markets has in fact outpaced growth in developed markets by more than double. Growth in gross domestic product (GDP) looks like it will continue to outperform that of developed markets for at least the next five years, according to estimates by the International Monetary Fund.

We are often asked why economic growth and stock market performance don’t always directly correlate in a given year, and if that’s the case, does a nation’s GDP growth matter at all when it comes to investing in companies? While it’s true that growth and stock market performance can be divergent at times, there is no question that growth matters since company earnings depend on general economic growth.

If you carefully analyze the breakdown of growth in emerging versus developed markets, you can see emerging markets have grown faster than developed markets for many years. In general, strong growth rates are regarded as a key characteristic of emerging markets. In the past 20 years, there was only one year, 1998, when growth in emerging markets lagged developed markets.

Markets in emerging Asia as well as frontier markets in Africa have been growing even faster than the overall average for emerging markets over the past few years, and we expect that trend should continue this year and beyond.

Rapid advances in technology have helped fuel the growth spurt, as emerging and frontier markets can take advantage of technological advancements while leapfrogging over the development phase.

We also think a major reason for this growth is tied to demographic trends. Younger age groups generally dominate populations in emerging nations in Asia and Africa, in contrast to many parts of the developed world and even more established emerging markets such as China, which are experiencing aging populations. People under the age of 40 are typically entering the most productive years of their lives; they are actively earning income and starting families. In the process, they are buying a variety of products, from consumer goods to vehicles to homes.

Of course, we have also found a number of markets where geopolitical or other events have frightened investors and caused short-term stock market selloffs, while GDP growth continued at a good clip. Since we still believe growth matters, the challenge for us is how to take advantage of growth trends when making investments.

In many cases, we focus on unregulated industries, technology plays such as cell phones and the likes and consumer goods—mass-market products like beer, soft drinks, snacks, instant noodles, and the like. These are the kinds of items consumers buy at an increasing pace in emerging and frontier markets when they have extra cash to spend. Consumers in many of these markets have limited money to spend, so companies are competing for a certain price ticket. A consumer may have to choose between buying a soft drink or time to talk on the phone.

So, we have found that companies in the consumer or retail space with a high market share can benefit from rising consumption and GDP per capita. These investments are particularly attractive if profit margins can be improved. We also see areas in the building industry, such as cement, as having a more direct relationship with GDP growth than some other types of companies. Of course, even in a fast-growing economy there will be losers as well as winners, so we need to identify those companies we believe are capable of benefiting from the economic growth.

Understanding the true value of a company and whether it’s trading above or below that value is the difference between investing and speculating.

People think that bold projects in emerging markets don’t get funding because of their audacity. That’s not the case. They don’t get funded because of a lack of measurability. Nobody wants to make a large up-front investment and wait ten years for any sign of life. But more often than not, if you can show progress along the way, smart investors will come on some pretty crazy rides.

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