The demographic shifts and fast pace of change in emerging markets present compelling investment opportunities, but also significant risks, Glen Finegan, Henderson's Head of Emerging Market Equities, writes.
The fast pace of change in emerging markets can present compelling investment opportunities. It also brings additional levels of risk.
While companies that generate their revenues from emerging markets are expected to deliver relatively higher levels of growth, the nature of these economies brings specific challenges and potentially higher levels of market volatility. This, in our view, calls for a particular approach.
Having a Record of Integrity
We believe a long-term, risk-aware approach is required. Given the often weak rule of law in many of these markets it is essential to invest alongside controlling shareholders and managers that have a record of integrity and that treat their minority shareholders fairly.
We also believe the market tends to underestimate how often non-financial risks become real financial losses, particularly in economies with immature legal and political systems.
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By looking to understand these risks to investors our research is uncovering a growing number of companies that exhibit a good record of corporate governance. One such example is Fuyao, a well-governed Chinese car glass manufacturer building a global business.
Fuyao’s founder chairman Cao Dewang has not only built an impressive company, but is also a trail blazer in China’s charitable sector and donated a significant share of the company to a foundation.
Family controlled
Companies we favour tend to have long-term owners whose wealth is invested in the same equity as that available to third party investors. This provides comfort that our interests are aligned. We also often prefer to search in less popular places for companies that are perhaps facing short-term headwinds and, therefore, are more likely to be reasonably priced.
In India, we have shied away from high-quality but richly-valued consumer companies. The cement sector may provide an alternative and less expensive way of capturing the rise of India’s middle class. Per capita consumption of cement is low and home improvements are a common use of savings in India.
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With the backing of the Birla family, we believe UltraTech Cement will continue to take a leading role in the consolidation of India’s fragmented and overly-indebted cement industry. Chairman Kumar Mangalam Birla is also recognised as a leading advocate for strong corporate governance in India.
Growing opportunities
Blurring boundaries between emerging and developed market opportunities means we do not analyse either in isolation. As a result, we invest in some multinationals listed in the developed world but with greater than 50 percent economic exposure to emerging markets.
Companies owned include PZ Cussons, the consumer-goods group based in Manchester that was founded in Sierra Leone in 1884. PZ has brands established in Africa, as well as countries such as Indonesia and Thailand.
Asset Growth in West Africa
Elsewhere, frontier markets, which are less established than emerging economies, are also broadening our investment opportunity set. After a prolonged period of poor stock and currency market performance, we find attractive valuations on many good-quality African businesses.
GT Bank of Nigeria, for example, has the most conservative record of the local Nigerian banks and trades close to its book value despite generating a high return on assets and offering a generous dividend yield. In our view, the long-term potential for asset growth in West Africa is substantial.
About Henderson Global Investors
Henderson Global Investors, wholly-owned by Henderson Group plc, is a global asset manager with a strong reputation dating back to 1934. Henderson manages 114,4 billion euros (as at 30 June 2016) of assets on behalf of clients in the U.K., Europe, Asia-Pacific and North America and employs approximately 1,000 staff members worldwide. Clients include individuals, private banks, third-party distributors, insurance companies, pension funds, government bodies and corporate entities. As a pure investment manager Henderson offers investments across equities, fixed income and multi-asset as well as alternative products, such as property and hedge funds. This press release is solely for the use of members of the media and should not be relied upon by personal investors, financial advisers or institutional investors.
Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. The information in this article does not qualify as an investment recommendation.
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