A research paper by US asset management firm Neuberger Berman holds that while emerging markets continue to show strong growth, those companies focused on local rather than global markets deliver the best returns for investors.
Mr Conrad Saldanha, Neuberger Berman’s New York based portfolio manager for emerging market equities and author of the paper, said that over the past 10 years, companies in emerging markets have improved their global competitiveness, and are also well-positioned to benefit from increasingly affluent local populations.
“Local consumption rates have accelerated in emerging markets as more and more households have entered the middle class – a dynamic that is impacting growth across various sectors.
“Consumer products companies are the obvious beneficiaries. Infrastructure is another example, as ongoing urbanisation drives the need for more road, railway, building and power infrastructure.
“We therefore believe locally focused firms have the potential to outperform those that focus on exporting to global markets. Furthermore, our studies show that in emerging markets, these companies have demonstrated less volatility than their globally oriented peers.
“Our research looked at whether there is a difference in the performance of companies in emerging markets that are primarily global and those that target local needs.
“Locally focused companies would include the above-mentioned consumer product firms along with domestic industrial and health care businesses. Globally focused companies include energy and material firms that sell commodities to a worldwide marketplace.
“We found that the locally oriented companies are likely to enjoy superior growth rates, while trading at a slight premium in terms of price/earnings ratio, to those focused on global markets.
“Locally focused firms offer more attractive appreciation potential given their exposure to growth in consumer and corporate spending and we believe they represent an attractive investment opportunity,” Mr Saldanha said.
The Neuberger Berman research looks at how the two categories of emerging market companies performed over an extended period, and also how they performed in different market conditions.
It analyses the returns of both locally focused and globally focused companies during the global financial crisis (May-October 2008)and during the subsequent recovery (from March 2009 to December 2010).
Mr Saldanha said that Neuberger Berman found that firms in emerging markets with a local focus outperformed during the downturn, at lower levels of volatility than their globally oriented peers, and also participated comparably in the ensuing market rebound.
“Furthermore, the smaller cap companies (those with a market capitalisation below US$10 billion) held up well in the downturn, and outperformed during the recovery. This counters the traditional view that small cap companies are a higher-risk investment option.
“Over the five year period ending December 2010, locally focused firms generated a total return of 93 percent while firms with a global focus appreciated only 77 percent. Smaller cap locally oriented firms appreciated almost 120 percent over the period.
“Globally focused firms do have certain attractions for investors – for instance, more diversified revenue streams and greater access to capital markets. But they also face more challenges to growth and, in many instances in emerging markets, have a high level of government ownership which may impact on their attractiveness to investors.
“Neuberger Berman’s approach is to apply careful bottom-up due diligence to help manage risk, analysing cash flow and scrutinising balance sheets and corporate governance. We are also mindful of who the majority shareholders are and where their interests may lie; the skill of the management team and board of directors; and, the reputation of the auditors.
“Applying these analyses to a diversified portfolio of companies across the emerging markets is a key part of managing a portfolio’s overall risk,” Mr Saldanha said.
Neuberger Berman was established in 1939 and is a US-based asset management company with approximately US$198 billion in funds under management throughout the world (as at 30 June 2011) and 400 investment staff. It is one of the world’s leading private and independent, employee-controlled financial services organisations. The company offers a number of funds in a range of asset classes including global and emerging market equities, bonds, and alternatives such as hedge funds and private equity. Neuberger Berman Australia gained a licence to operate in Australia in April 2011.
For more information please contact:
Paul O’Halloran – 03 9607 8452
Lucas Rooney – 03 9607 8456
5 September 2011