Emerging Market Investment for the Risk Averse

Don't want to take on the risk of emerging markets investment, but do want exposure to the economic growth opportunities? Choose UK, US and European stocks with global revenues

Emma Wall 13 November, 2014 | 1:44PM
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This article is part of the Morningstar's Guide to Emerging Market Investing. Click here to find out just what an emerging market is and which hold the potential to grow exponentially - boosting your investment portfolio.

Emerging market investment can be a risky business. For those with the appetite for volatility – and a long-term investment horizon – emerging markets can bear fruit, helping boost your portfolio into double digit returns.

But what if you don’t have the aptitude to stomach losses, or your investment horizon is short and your goals set in stone? For many investors approaching retirement, or those using the stock market to attain a certain savings goal, it is advisable to stick to assets with a lower volatility profile. In these cases emerging market equities may not be suitable. However this doesn’t mean you have to miss out on all the upside emerging economies can add to your portfolio.

More than 70% of the revenues of FTSE 100 companies come from outside of the UK. That means that cash coming into the company is sourced from other developed markets – and for an increasing number of stocks, emerging markets too.

Gold Rated Aberdeen fund manager and emerging markets veteran investor Hugh Young has 13% invested in UK-listed stocks with emerging market revenues in his Asia Pacific fund. These include banks Standard Chartered (STAN) and HSBC (HSBA) and oil majors Rio Tinto (RIO) and BHP Billiton (BLT).

“The oil stocks are a major part of the Australian market, which is part of my jurisdiction – but they are significantly cheaper to buy in the UK. I can buy them at a 10% discount to the Australian listing,” said Young. “As for the banks, they are much more liquid in the UK compared to their emerging market listing, which is a great benefit when managing a fund as large as mine.”

Investing in developed market listed stocks with emerging market revenue streams means that you can get the corporate governance, share price stability and shareholder engagement that you expect from a developed market equity, but with the growth from emerging markets.

Unilever (ULVR) is another stock that benefits from significant emerging markets sourced revenues. With roots that trace back nearly 140 years, Unilever now operates as a leading player in consumer goods, selling products in more than 190 countries.

Morningstar equity analyst Erin Lash assigned Unilever a wide economic, meaning the stock has a significant advantage over peers, because of is vast scale, which would be costly to replicate.

“Slowing global demand is taking a toll on Unilever – given its vast geographic footprint – foreign currencies have been a notable dark spot, constraining reported sales through the first nine months of the year,” said Lash.

“However, we view longer-term concerns related to this as overblown. While negative foreign currency movements disproportionately weigh on emerging markets, we still expect these regions will outpace more mature markets over the near to medium term, reflecting austerity measures in Europe and high unemployment levels and intense competitive pressures, particularly in mature developed markets.”

Bronze Rated fund JPMorgan Emerging Markets also features a London-listed company in its top 10 stocks – SABMiller (SAB).

SABMiller has immense scale, controlling about 10% of the global beer market. The company earns a majority of its operating profits from developing and emerging countries, and Morningstar analysts think these regions have the potential to deliver strong and balanced volume and price/mix growth over the coming years.

“Over the past few years, SABMiller has been one of the most compelling emerging markets stories in our consumer defensive coverage universe,” said analyst Philip Gorham. “It remains a strong business, with a wide moat based on its cost advantage in Africa and an impressive growth profile from its broad emerging markets presence.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
abrdn Asia Pacific Equity A Acc316.08 GBP0.16Rating
HSBC Holdings PLC697.00 GBX0.07Rating
Rio Tinto PLC Registered Shares5,785.00 GBX2.41Rating
Standard Chartered PLC781.60 GBX-0.53Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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