Few things in recent years have symbolised the end of empire better than the lowering of the Union flag over Hong Kong. It wasn’t as dramatic as the sacking of Rome. But for anyone standing outside Government House on 1 July 1997 as the British colony was handed back to China, it was no less significant.
On 2 June this year, the US had its own Hong Kong moment. General Motors, once the embodiment of US economic might, agreed to sell its Hummer brand to a little-known Chinese manufacturer, part of the process of slimming down and entering Chapter 11 bankruptcy. If there were any doubts before the event that economic dominance is moving away from America, the sight of a nimbler, smaller rival picking over the bones of the US giant should have dispelled them.
Emerging markets are the world’s new economic powerhouses. And their companies are increasingly going global. Emerging multinationals, such as Indian information technology (IT) firms Wipro and Infosys, have revolutionised the $180bn global IT market, while brewers such as South Africa’s SabMiller are snapping up rivals in Europe and beyond.
Meanwhile, fuelled by low labour costs and rapidly growing domestic markets, America Movil, Latin America’s largest mobile-phone company, is expanding fast in the US, while Brazil’s Embraer has surged past Canada’s Bombardier to become the world’s number-three aircraft maker. We are, as Fareed Zakaria writes in his book The Post-American World, “living through the third great power shift of the modern era”.
• The first shift, says Zakaria, was the rise of the Western world in the 15th century.
• The second, in the closing of the 19th century, was the rise of the US to dominate global economics, politics, science and culture.
• Now, along every dimension – industrial, financial, social, cultural – the distribution of power is shifting.
This third wave isn’t so much about the decline of America, says Zakaria, as about “the rise of the rest”. And as less wealthy nations across the world continue to grow, it won’t be long before the biggest companies you have never heard of become household names. In fact, it’s already happening.
Between 2006 and 2008, the number of firms from emerging markets in the FT Global 500 (which lists the world’s top 500 firms ranked by market capitalisation) has quadrupled from 15 to 62. Multinationals from Brazil, China, Mexico and Israel have pushed aside rivals from more developed markets as they acquire, or merge with, aged rivals in the US, Europe and Japan. Being younger challengers, they are growing far more rapidly.
For example, a report from Boston Consulting in January listed 100 firms that are leading the push into global markets from what Boston dubs “rapidly developing economies: (RDE)”. Revenues from these 100 firms grew at 29% a year from 2005 to 2007, outpacing rivals in the S&P 500, Nikkei 225 and Dax 30. This trend continued in first half of 2008, when challengers’ revenue rose by almost 32%. This is likely to have dropped during the credit crunch. But whose hasn’t?
These firms are also more profitable. The 100 RDE challengers made operating profits of 17% in 2007. The S&P 500 average is 14%. Take Infosys and Accenture, two companies involved in much the same business: providing IT consulting and software services to firms in the banking, telecommunication and manufacturing sectors. At first sight, the Fortune 500 company towers over its Indian rival. Accenture made sales of $25bn in the year to August 2008, against $4.2bn for Infosys (in the year to March 2008). However, the Indian group boasts operating margins of 30.7% compared to Accenture’s 11.9%.
Of course, younger more vigorous firms snapping at the heels of older rivals isn’t a new phenomenon – it’s central to the whole capitalist system. In the second half of the 20th century, South Korean firms such as Samsung and Hyundai stole a march on more established rivals, including Toyota in Japan and Krupps in Germany. They “began by making products efficiently and cheaply but now have recognised brand names, a high-quality image, world-class technology, and appealing designs”, says Antoine van Agtmael in The Emerging Markets Century: How a New Breed of World-Class Companies Is Overtaking the World.
The same factors are at work today, on a grander scale, meaning that “as time goes on, more emerging-markets firms will take over long-established Western companies, including those they now supply”. They certainly have the money and know-how to do so. “In many cases, they have built large home markets and made good profits on those markets enabling them to build up a cash pile for overseas expansions,” says Mark Mobius, manager of the Templeton Emerging Markets investment trust. While the financial crisis and recession has hurt firms across the world, it has also given others the perfect opportunity to snap up assets in the West.
China is a case in point. Prior to the crash, the country’s attentions have not always proved welcome. They’re hardly getting a smooth ride now (mining giant Rio Tinto’s decision to walk away from a $19.5bn deal with state-owned aluminium group Chinalco is a case in point). However, it’s fair to say that people become less fussy about where money comes from when they’re in dire need of it.
According to BusinessWeek, China’s overseas investments doubled last year to $52bn, with expectations of a 13% rise this year. And with Beijing eager to swap its vast dollar reserves for physical assets, firms are being pushed to get out and do deals. “We must encourage our top enterprises to go out and enter overseas markets and expand their businesses,” says Li Rongrong, head of the agency responsible for China’s biggest state firms.
And as well as money and ambition, these challenger companies also “have managements who have honed their skills in difficult emerging market conditions and are thus able to withstand any difficulties as they expand overseas”, says Mobius. Success, it seems, is guaranteed.
Well, not quite. Big emerging-market firms are no more immune to ‘imperial over-stretch’ and egotistical empire-building than their Western counterparts. For example, D’Long Group, a Chinese investment company, bought German aircraft manufacturer Fairchild Dornier to much fanfare in 2003, only to seek bankruptcy protection a year later.
And you only have to look at the purchase of Jaguar by Tata Motors and Fortis Bank by China’s Ping An to realise that not all of these deals are destined to be successes. “With hindsight, [purchases such as the Jaguar deal] were close to the top of cycle,” says Sam Mahtani, director of emerging equities at F&C, with companies having to stretch their balance sheets to complete them.
There are unsettling echoes of the 1980s about this, when Japanese companies bought Colombia Pictures, the Rockefeller Centre and of course, Van Gogh’s Sunflowers, for which Japanese insurance magnate Yasuo Goto paid the equivalent of $39,921,750 at auction at Christie’s in London – a record price for a piece of art at the time.
However, “a lot of this was the buying of quasi-trophy assets and not strategic”, says Julian Mayo, investment director at Charlemagne Capital. We’ve yet to see that sort of manic over-confidence take hold in any emerging economies. This isn’t a stratospheric bubble in one single economy we’re talking about here – it’s a big, gradual shift in power.
This year could represent a major turning point in that shift. According to the Centre for Economics and Business Research (CEBR), the US, Canada and Europe will contribute 49.4% to the world’s total gross domestic product in 2009.
This is the first time since the beginning of the Industrial Revolution in the mid-19th century that non-Western economies will have produced more than half of the world’s GDP. The key for investors is to establish which of the rising multinationals – and firms that have the potential to go global – will survive and make them money.
We look below at the most promising stocks in key sectors.
The ‘multinationals of the future’
Telecommunications
One area where emerging-market companies have made huge inroads is telecommunications. Mobile-phone firms are using bases in stable countries such as South Africa and Singapore to expand across the globe. Take MTN Group (Jo’Burg: MTN). Once a small mobile-phone operator in South Africa, it now spans 21 countries across Africa and the Middle East, with a full one in five of the 500 million people living within its network subscribing to the service. It trades on a p/e of 15.
SingTel (SP: ST), Singapore’s largest telecoms firm, holds significant stakes in six foreign mobile operators: India’s Bharti Airtel; Indonesia’s Telkomsel; Thailand’s Advanced Info Service; Pakistan’s Warid Telecom; Globe Telecom in the Philippines; and Pacific Bangladesh Telecom. SingTel operates in Singapore and in Australia through Optus, and trades on a forward p/e of 14, yielding around 3.5%.
Finally, for access to Latin American, América Móvil (US: AMX) is the world’s fourth-largest mobile-phone firm, with a 70% share of the Mexican mobile-phone market. It also provides wireless access for devices such as Apple’s iPhone and netbook computers as it bets on a mobile broadband boom in Latin America. The group added 3.7 million wireless subscribers during the second quarter, lifting its total wireless client base to 190.3 million across 18 countries at the end of June. Its forward p/e is 13 and it yields just over 1%.
Banking
As regular readers will know, we’re still very wary of Western banks. For access to emerging markets, London-listed Standard Chartered (LSE: STAN), on a p/e of 11, offers plenty of exposure to Asia, as does rival HSBC (LSE: HSBC). However, while both banks managed to evade the worst of the credit crunch, we’d suggest that investors with a strong risk appetite might be better off taking a look at some smaller, developing banks with stronger potential for growth as the growing global middle-class demands wider access to credit and other financial services.
Prime among these is the Nigerian banking sector. “Despite the challenging operating environment, Nigerian banks continued to report strong earnings growth in 2008 on the back of rapid credit and deposit growth and Fitch expects earnings growth will continue in 2009, albeit at a slower pace,” says Anthony Walker of Fitch’s Financial Institutions last month. You can buy shares in Guaranty Trust Bank (LSE: GRTB) and Diamond Bank (LI: DBGA) – which account for a sizeable share of the Nigerian retail market – on the London Stock Exchange.
Another to watch – but only to watch for now – is ABSA African Bank (JBG: ASA). South Africa’s largest consumer bank, it also has stakes in banks in Tanzania, Zimbabwe, Mozambique and Angola. On a forward p/e of 8.8 it looks cheap. However, while South Africa’s banks escaped the worst of the credit crunch, they’ve been hit hard by rising defaults as customers struggle to pay for cars and other home loans. So we’d hold off on buying until we’ve seen how ABSA has been affected. Results are due on 3 August.
Beer and brewing
From 2005 to 2008, brewers had to raise their production levels by 14% to meet global demand, says Reuters. Consumption is steady in the West, but rocketing in Chile, Africa and Thailand, for example. You can get access to the African beer market through SabMiller (LSE: SAB). This well-known multinational brewer, with its roots in South Africa, owns beer brands ranging from Pilsner Urquell to Peroni and Miller. But on a forward p/e of 15, and a yield of 2.95%, it’s not an obvious bargain.
A more interesting play to us is Singapore-listed Thaibev (SP: THBEV), one of southeast Asia’s biggest alcohol manufacturers. It has 18 distilleries in Thailand, three breweries and five whisky distilleries in Scotland. You might know its beer brand Chang from its sponsorship deal with Everton Football Club. The group has cornered 47% of Thailand’s beer market and looks good value on a forward p/e of 11 and a tasty yield of 6.1%. In Latin America, Grupo Modelo (US: GPMYC), owner of the Corona brand, is one of the most dominant players. But on a forward p/e of 12 compared to Grupo Modelo’s 19, we’d sooner plump for Compañia Cervecerias Unidas S.A. (NYSE: CCU), the Chilean beverage company. It controls 86% of the Chilean beer market, but sells in Argentina too, and also has the licence to make and sell soft drinks such as Pepsi.
Engineering and technology
Embraer (NYSE: ERJ), as mentioned above, is one of the largest aircraft manufacturers in the world. It’s been hit hard by the recession, but should benefit from “the eventual recovery in the global aviation market, as well as the growth of the industry within new regions, particularly Latin America”, says Hugh Young, managing director of Aberdeen Asset Management Asia Ltd. On a price/book-value ratio of one and a forward p/e of 5.5, it currently looks super cheap. One to tuck away for the long term.
South Korean firms such as Samsung and LG started out as manufacturers of cheap electronic products. Now they’re recognised brand names. The same is happening to Taiwanese computer firms Asustek (LI: ASKD) and ACER (LI: ACID) today. Asustek is credited with pretty much inventing the notebook, which have seen sales continue to rise as cost-conscious consumers opt for them over PCs. Acer is expected shortly to overtake its US rival Dell as the largest PC seller in the world. While Dell saw its market share slip 2.4% in the second quarter compared to the same period a year ago, Acer’s slice of the market grew by 2.7%, according to Reuters. Acer currently trades on a forward p/e of around 15, while Asustek is on 24. Neither stock is cheap, but given their good growth prospects, they look worth having some exposure to.
Another emerging multinational tech stock liked by Aberdeen’s Hugh Young is Infoysys (NYSE: INFY). The group is one of India’s biggest software developers and has evolved from being “a low-cost provider to one offering globally-competitive, value-added services.” It currently looks overbought, so it’s one to keep an eye on and then buy when the next correction comes round.
• This article was originally published in MoneyWeek magazine issue number 446 and was available exclusively to magazine subscribers. To ensure you don’t miss a thing, and get instant access to all our premium content, subscribe to MoneyWeek magazine now and get your first three issues free.