I feel very fortunate to have had the opportunity to live and work abroad for a number of years. Tokyo, Hong Kong and Singapore were not only fascinating places in their own right, but they also served as bases from which to travel extensively around Asia.
"It tended to be the dull companies that proved better investments"
Most of the countries I visited during my 23 years based in Asia were ‘emerging’. It was clear from the huge amount of construction activity and locals’ embrace of Western brands - other than in North Korea, that is - that these countries were changing rapidly. Investment opportunities were everywhere, and it was thus with some dismay that I read an article recently suggesting that investing in emerging markets no longer made sense.
The article pointed to three main changes that are impacting emerging markets and rendering them less attractive investment destinations. These are: the reversal of globalisation, the slowdown in Chinese growth, and the change in global financial conditions after a decade of easy money.
All three, the article argued, had the potential to dim growth and thus remove part of the core rationale for investing in the asset class.
In my own case, the more experience I had visiting and investing in emerging markets, the more I realised that their higher economic growth did not necessarily make their stock markets great places to invest. Nowhere was this clearer than in China.
Between 1992 and 2018, China’s economy in real terms grew 1091%, equivalent to 9.6% per annum. On the other hand, over the same period, the MSCI China index appreciated in total return dollar terms by just 31%, or 1% per annum. Most of the growth in Chinese companies’ revenues, it seems, failed to make it to the shareholder, or at least to the minority shareholder.
All companies, wherever incorporated, have stakeholders. These generally include employees, suppliers, lenders, local and central governments, majority shareholders and minority shareholders. In most countries, companies understand that it is in their long-term interests to look after minority shareholders. Not so in China, where the greater good - whether the enrichment of workers or the enrichment of corrupt officials - has, it seems, taken priority.
India provides an interesting contrast. Although its economy has grown by just 6.7% per annum in real terms since 1992, returns to minority shareholders have kept pace, with the MSCI India index posting average annual total returns of 8.2% in dollar terms over the 27 years.
Stock exchanges in both China and India were established in the 19th century. However, India’s has existed ever since, while China’s closed during the communist years and only reopened in 1990. Perhaps China’s flirtation with communism impacted some of the core values to which stock markets elsewhere adhere.
I also found that it tended to be the dull companies in emerging markets that proved better investments rather than those that sought to capture the high economic growth by expanding rapidly into new products or new countries.
This observation was confirmed in 2012 paper by Martijn Cremers titled Emerging Market Outperformance: Public-traded Affiliates of Multinational Corporations.
Cremers identified 92 such companies and found that subsidiaries of the likes of Unilever, Nestle, Castrol and Heineken that were listed on an emerging market stock exchange had in general significantly outperformed their respective local index as well as their parent.
He surmised that although shampoo and beer might be dull industries in an advanced country, in an emerging country they were exciting. However, it seemed that what really made the companies great investments was that they generally adopted the high governance standards of their parent, ensuring not only that profit did not get thrown down the toilet, but also that it was passed to shareholders, large and small, via dividends.
Published in What Investment
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.
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