As the debate continues about how best to gain exposure to the emerging markets growth story, last year Aberdeen Asset Management, the world’s largest emerging market manager of closed-end funds, commissioned Yale University’s Martijn Cremers to carry out a study on locally-listed EM affiliates of multinationals.What Cremers found was that the share price performance of these listed affiliates was vastly better than that of both emerging and developed markets broadly as well as their own local markets.
There are 92 such companies across the emerging world, including Unilever PLC, for example, that has listed affiliates in India, Indonesia and Pakistan in which it has stakes of 37%, 85% and 75% respectively. Over the thirteen years from June 1998 to June 2011, a period chosen for its balance between sample size and history length, the listed affiliates returned 2,229%. This compared with total returns of parents, local markets and parents’ markets of 407%, 1,157% and 147% respectively.
This pattern of outperformance was consistent across each region too. Affiliates in LatAm, EMEA and Asia outperformed their local indices by 41%, 134% and 50% respectively. Adjusted for volatility the affiliates’ performance was even better, as many of them demonstrated defensive qualities during the 2008/9 financial crisis.
These findings contradict the so-called perceived wisdom of those who have argued the most effective way for investors to obtain exposure to emerging markets is through developed market companies. Since active managers in the emerging world generally underperform, their argument continues, why not buy a multinationals ETF?
Because you would miss an opportunity to earn some great returns from certain emerging markets companies. It is true that returns from emerging markets as a whole have not been commensurate with their economic performance over the last 20 or so years. Over time, stock markets should in theory track economic performance. Although this relationship has held true in developed markets, it is much less evident in the emerging world. From 1992 to 2010 China’s economy, in nominal RMB terms, grew by 14 times but its stock market, as measured by the MSCI China index, went nowhere.
At a regional level too a similar picture emerges. Over the last 20 years, real GDP growth of the Asia Pacific ex-Japan region has been around 4 percentage points higher than that of the US. However, over the same period, the MSCI AC Asia Pacific ex Japan index has performed pretty much in line with its US counterpart.
Paradoxically, it is the strong growth of emerging economies that is the cause of the relatively poor performance of its equity markets. Many companies, mesmerized by the potential around them, invest large sums in new capacity, often outside their core area of expertise. A focus on top line growth rather than profitability tends to result in destruction of shareholder value, as indeed has been the case.
Consequently investors have been right to be wary of the average emerging markets company, but this does not mean one should be wary of all of them. Those that have been very disciplined about expansion have tended to be the better performers over the long term. But discipline requires a strong corporate culture which can take decades to build. Unless, that is, you have a parent with a strong culture, ie affiliates of multinationals. Affiliates have generally adopted, explicitly or implicitly, their parents’ business culture and corporate governance practices and with them a stronger focus on shareholder returns. Furthermore the financial support from their parents, perceived or real, have served affiliates well in the good times but particularly during the difficult times.
Martijn Cremers, Associate Professor of Finance at Yale School of Management, comments:
“Publicly-traded emerging market affiliates of large multinational corporations have shown remarkably good performance over the last 14 years. These affiliates combined high performance with lower volatility, outperforming both their local market and the wider emerging markets, but not at the expense of significant greater down-side volatility.
“The two main reasons for this outperformance are improved corporate governance and a stabilizing role of the parent companies. Both seem critical specifically in financial crises. These give affiliates a clear comparative advantage over their local competitors that should endure in the foreseeable future.”
Peter Elston, Head of Asia Pacific Strategy & Asset Allocation, adds:
“While there will continue to be home grown success stories, the strong corporate culture of affiliates is a competitive advantage for the companies in this select group is hard to ignore. Opportunities in emerging markets are perhaps more attainable than "stay at home" types think.”
About Aberdeen Asset Management and emerging markets
Aberdeen Asset Management invests worldwide on behalf of clients globally across its major asset classes - equities, fixed in-come and property as well as tailored solutions. It is the largest manager of emerging market closed-end funds offered around the world by both value and number (US$6.3 billion, sixteen closedend funds listed in London, New York and Toronto, source Fund Consultants LLC).Download this release Back