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Growth in emerging markets will be considerably stronger over the long term than in Europe or the US. For risk reasons, not all investors want to invest directly in emerging markets. Investments in western winners allow investors to take advantage of growth in emerging markets using a less risky approach. Western winners are companies that are headquartered in developed countries in Europe, North America and, in some cases, Japan, but which generate a large share of their turnover in emerging markets. This Q&A answers the most frequently asked questions on western winners.
The equity markets in emerging economies have corrected in recent weeks. Has the growth story of emerging markets come to an end?
The equity markets in countries such as Brazil, China and India corrected in June. This does not, however, say anything about the long-term growth prospects of these countries. The growth potential of emerging markets is likely to remain intact. The number of people alone who will join the middle class thanks to increasing levels of prosperity is set to quadruple in the coming 20 years.
What does this development mean for investors?
Demand for consumer goods is set to increase massively. This will begin with the basics such as toothpaste, shampoo and creams. In India around CHF 2 per head is currently spent on cosmetics. In the developed countries this figure is more than CHF 130. Experience shows that the more prosperous a society is, the more that is spent on cosmetics. However, the same also applies to drinks, furniture for the home and cars.
Economic growth in emerging markets is of course subject to fluctuations. It is likely that emerging markets will this year post below-average growth. Nevertheless, this growth will be much higher than in Europe or North America.
Which companies belong to the western winners?
Many western winners are very well known. These include, for example, major drinks and food manufacturers and cosmetics groups. They are based in North America or Europe and thus meet stringent disclosure provisions. At the same time, they generate between 20% and, in many cases, 50% of their turnover in emerging markets with rapid long-term growth rates. It is important to note here that the activities of the western winners in emerging markets are not limited to the four renowned BRIC giants – Brazil, Russia, India and China. These companies are often also active in smaller aspiring countries. This represents a further advantage for investors. Furthermore, western winners operate in both cyclical and defensive industries, helping to minimise the risk of a portfolio.
Do the western winners understand how consumers in emerging markets tick?
Western winners often tailor their offering to the local conditions in a very skilled manner. For example, a manufacturer of plastic goods will offer the same product range in India’s major cities as it does here in Switzerland, i.e. food containers that can be placed directly in the microwave. In rural areas, however, it will sell containers that make it easier to store fruit and vegetables from the garden. The car industry has also demonstrated its adaptability: a premium producer is, for example, offering a watered-down version of a middle-class model for China.
What are the prospects for western winners?
Over the long term, a portfolio containing selected westerns winners stocks in the single-digit percent range is likely to outperform a global equities portfolio. When emerging markets boom, however, these portfolios tend to fare less well than portfolios exclusively comprising emerging market equities and vice-versa, as was the case in 2013 when the markets of emerging economies underwent a correction. Western winners stocks are suitable for investors who want to participate in the growth potential of emerging markets, but who want to do so at a reduced level of risk relative to a direct investment.
For further information on the topic of western winners, please contact your UBS investment advisor.