Developing Nations Offer Opportunities

Physician's Money Digest, October31 2003, Volume 10, Issue 20

New York Times

Large sums of money are flowing into the stockmarkets of developing countries, helpingthem produce better returns than larger markets.The global index of emerging marketscompiled by Morgan Stanley Capital Internationalsported a near 16% return this year through June. Bycomparison, a report notes, developedmarkets returned only 11.1%.

Price Is Right

The general rule of thumb is that investments areeither popular or cheap. Investments in emerging markets,however, are both popular and cheap. Advocates ofemerging markets point out that even after consideringtheir strong performance this year, shares in these marketsare still less expensive than those in developed countries.It's not uncommon to find quality companies tradingon single-digit price/earnings ratios, with double-digitgrowth rates and growing yields, says David Gait ofFirst State Investments, a fund management firm.

Times

Many of those companies are traded on Americanmarkets; others can be bought only on local marketsthrough global brokerage houses. Alternative investmentroutes include traditional mutual funds and closed-endfunds, which generally trade at a discount to their underlyingasset values. Some funds concentrate on singlecountries, the article reports, while others focuson regions or emerging markets worldwide. In addition,some exchange-traded index funds focus on a broadrange of emerging markets, and others on smaller geographicsegments.

Based on estimated 2003 earnings, developing marketsoverall have been trading at a price/earnings ratio ofabout 10—approximately half that of the Americanmarket—says Sam Mahtani, who runs an emerging marketsfund for F&C Management in London.

Even more interesting, according to Mahtani, is acomparison of returns on equity. He notes that a publiclytraded company in the developing world normallyreturns about 15 cents a year for every dollar of equity.Although this is similar to American companies, developingand developed markets have been heading inopposite directions. Following the financial crisis of thelate 1990s, when emerging markets in Asia and elsewhereencountered declining economies, their returnssank. Returns on equity in the developing world were7% in August 1998; US returns were more than 20%.

That crisis, Mahtani explains, forced policy responsesfrom developing governments and the corporate sector,leading to significant increases in profitability andshareholder returns. Simultaneously, many Americancompanies are experiencing sluggish growth and excesscapacity in many industries.

Emerging Market Funds

Asia is 1 of the preferred markets for fund managers.One of Mahtani's fund's larger holdings isReliance Industries, a diversified Indian holding companywith extensive business in petrochemicals.Another of his favorites is Ranbaxy Laboratories, anIndian company that manufactures generic drugs.Korea accounts for 21% of Mahtani's fund's assets—the largest of any country—including shares inKookmin Bank and SK Telecom.

Hugh Young, head of global equities at AberdeenAsset Management, also likes Asian investments.Samsung Electronics, a Korean manufacturer of computerchips and electrical appliances, is a favorite of his.He likes PetroChina, the Chinese national oil company;GAIL, an Indian natural gas company; Hyundai Motorin Korea; and China Mobile in Hong Kong.

Gait recommends Infosys Technologies and HDFCBank, both Indian companies. Lower salaries in Indiaallow Infosys (a computer program supplier to developedcountries) to compete effectively against Westerncompetitors. Although Infosys has been hurt by a declinein technology spending, Gait calls it "a shining light inemerging markets." He says HDFC has strong executiveswho are "conservative but innovative," allowingthem to compete effectively against India's inefficientstate-run institutions.

Fund managers also favor Latin American investments.Young's preferences: Petróleo Brasileiro (Petrobras),the Brazilian national oil company; Teléfonos deMexico, and Souza Cruz, the Brazilian subsidiary ofBritish American Tobacco. Gait likes Coca-Cola Femsa,a Mexican Coke-bottling company, and Grupo Televisa,the country's largest broadcaster.