Blue-chip stocks listed in the developed world could soon become a strategic part of emerging market portfolios, according to managers.
As multinationals source an ever larger proportion of their revenues from developing countries, these stocks are moving onto the radar of emerging market managers.
First State’s Glen Finegan, who co-manages the £600m Global Emerging Markets fund with Jonathan Asante, says he increasingly expects blue chip names to feature in the portfolio.
“There are multinationals which have more than 50% of their profits from emerging markets and if that happens, we consider them emerging markets stocks,” he says.
Finegan says part of the attraction is pricing.
With so much money flooding into emerging markets, in some cases valuations are equal to 30 or 40 times earnings, especially in Bric countries.
In contrast, concerns over growth and sovereign debt means many European and US names are trading on far cheaper multiples.
“One question we are asking ourselves as a bottom-up investor is: why would you buy Mexico’s WalMex on a high 20s multiple when Wal-Mart is in the low teens?” he says.
“One company we are looking at is Colgate-Palmolive. It is on 15 times earnings and has more than half its profits from emerging markets, particularly Latin America.
“It is extremely well run, has a long track record and an experienced management team.”
In agreement with Finegan is Philip Poole, global head of macro and investment strategy at HSBC .
“It makes a lot of sense, especially on valuation grounds,” he says.
“The emerging market consumer story is going to become much more important and there will be beneficiaries in the emerging market world and the developed world.”
However, other managers are less keen to ‘water down’ their emerging market portfolios with developed market blue chips.
Aberdeen’s Mark Gordon-James says: “It will suit some managers to invest in multinationals, but we would rather not dilute the exciting growth of the emerging market part of the business with the developed market part.
“You get a much cleaner story if you invest directly in emerging markets.”
Finegan is mindful of unintentionally changing the remit of his fund, but says the definition of emerging markets is shifting.
“We are aware we are running an emerging markets fund so you will not be seeing large exposures to these sorts of companies in the short term, but you can ask: will these terms even exist in five years’ time?” he says.
Poole adds: “A lot of the distinctions about what makes an emerging market are pretty arbitrary, and what is important is the theme in which you are investing and the liquidity of these companies.”
