While the World Bank may have revised down its 2015 GDP growth forecast in emerging markets to 4.4% from the 4.8% predicted in December, EM investors will be relieved to see that it is not a blanket case.
Hit by low oil prices, the Brazilian and Russian economies are set to shrink, China remains on course to achieve estimated growth of 7% while India appears to be on the way to exceeding the December projection and hit 7.5%.
Investors should be looking to the retail sector, says Mobius, manager of Franklin Templeton’s emerging market fund suite – though there are hurdles to be wary of.
“Internet sales have pushed up prices at a retail level in many areas, which is a real challenge for the retail sector,” he explained. “The question is over how companies change their model, and it is having an impact on the whole retail business.
“I think that the [retail sector] will eventually become low-price retailers – Aldi, Walmart, and so on – competing with the internet, while on the other side there will be the Louis Vuittons, Chanels etcetera selling their luxury products. It will be interesting to see how it develops going forward.
“One possible approach is companies opening more stores, which means they have more space for stock and can then demand lower prices from their suppliers.”
It is these factors that Mobius’ team keep in mind when selecting stocks for his Templeton Emerging Markets Smaller Companies Fund, which carries respective overweights of 7.73% and 7.51% in consumer discretionary and consumer staples.
“The best place to find companies that pick up GDP growth is in the consumer sector,” said Claus Born, portfolio manager and investment analyst at Templeton Emerging Markets Group. “Companies there are most likely to benefit from increasing consumption and GDP per capita.
“With increasing GDP growth emerging markets get a higher penetration of the formal retail sector –supermarkets and department stores grow at a multiple of GDP growth, and can improve margins and earnings. There is also a very strong relationship between consumer staples and GDP growth, which translates into sales and earnings growth.”
Born highlighted cement companies in particular as one of his favoured approaches, but is positive on consumer-orientated businesses as a whole.
“Cement companies are an indirect play on construction, which is driven by GDP growth,” he expanded.
“Generally there are enough cement companies in local markets, and there also a lot of global companies which have a high emerging market exposure. While they may be in different industries, there are consumption-based companies across all emerging markets.”
Striking the right deal
Mobius also cited dividend pay-out ratios as another attractive aspect of investing in emerging markets stocks, though he conceded that finding the right deal can often be market-specific.
He said: “Generally speaking there is much more sensitivity around dividends among emerging market companies, probably because investors from developed markets keep asking them to increase dividends and pay-out ratios. At the moment, the minimum pay-out ratio we would consider is around 30%.”
“One example we like is Chile, which has a mandatory 30% dividend pay-out ratio,” added Born. “It is a fair amount that enables companies to pay more while growing their business. Also, dividend yield is always a good indicator of corporate governance.”
