Wise investors may want to consider the long-term growth of emerging-markets companies and forget the current turmoil.
Disruptions that have hit currencies in Turkey and Argentina have led to considerable volatility this year, but they don’t have anything to do with the long-term story of increasing spending power among consumers in many emerging economies.
Tony Arsta, one of the lead managers of the Motley Fool Emerging Markets Fund TMFEX, -0.07% (the other is Nate Weisshaar), argues that many companies in emerging markets “have multidecade growth in front of them,” and that EM companies focused on local consumers with increasing spending power, such as Alibaba BABA, +2.03% “are just getting started.”
The Motley Fool Emerging Markets Fund was established in 2011 and is small, with only $35 million in assets under management. But it has a four-star rating (out of five) from Morningstar. We’ll look at some of Arsta’s favorite stocks, but first, here’s a comparison of how emerging-markets stocks have performed against U.S. stocks.
Charts tell the storyHere are four charts comparing the performance of the MSCI Emerging Markets Index 891800, +0.13% with that of the S&P 500 Index SPX, +0.21% First, 2018:
And now a five-year chart:
FactSet>Ten years:
>The 15-year chart is an eye-opener:
FactSet>The 10-year chart shows significant outperformance for U.S. stocks as it encompasses the domestic bull market that began in March 2009, as well as greater volatility of the MSCI Emerging Markets Index during that period. But as you go further out, the emerging-market economic growth story shines through.
So the longer-term chart makes a solid case for having broad long-term emerging-markets exposure as part of a diversified portfolio.
In an interview on Aug. 16, Arsta said that “over the past two decades emerging markets have been driven by exports to developed countries. So when there is a shock or slowdown in developed countries, it hurts EM.”
Recent currency shocks are in emerging markets, but not those showing the greatest increases in spending power among consumers. And we may be in for a developed-market shock with the new Italian government’s apparent resistance to the European Union’s suggested remedies for its troubled banking system.
But none of those short- to medium-term threats affect the long-term story of increasing spending power among consumers in China, many other Asian nations, as well as those in Africa and Latin America. So Arsta and his colleagues focus on emerging-market companies that derive most of their growth from the increased spending power of consumers in their local markets.
Companies for ‘multidecade growth’Getting back to Alibaba, the fifth-largest holding of the Motley Fool Emerging Markets Fund as of June 30, Arsta said the company won’t gain more market share as it already dominates online retail in China, “with JD.com JD, +2.39% a distant second.” But he believes that won’t be a problem for Alibaba.
Motley>“The purchasing power of the Chinese consumer will continue for multiple decades, and Alibaba is best positioned,” he said, through TMall, the site through which the company sells directly to consumers.
Here are example of companies held by the that Arsta believes have a long runway for increasing sales and profits as emerging-market consumers continue to gain spending power:
MercadoLibreMercadoLibre MELI, -1.08% based in Argentina, runs popular, localized e-commerce sites throughout Latin America. Like Amazon.com AMZN, -0.04% it sells directly to consumers and also processes transactions by other sellers through its websites. Sellers can also use the company’s MercadoPago system to process point-of-sale transactions.
The company’s stock has had a bumpy ride this year:
FactSet>”MercadoLibre has struggled recently because of investments into their logistics and supply chain,” Arsta said. “They are still serving as a platform to sell other peoples’ goods (similar to Fulfillment by Amazon), but south America does not have a similar infrastructure to that provided in the U.S.”
Arsta reiterated his stance on multidecade investment plays. He believes that with improvements in the ability to deliver products and wider adoption of MercadoPago, MercadoLibre’s long-term thesis is intact.
SafaricomSafaricom SCOMO, +0.00% is Kenya’s largest telecom-services provider. The shares are only traded locally in Kenya. However, Vodafone Group VOD, +0.53% owns 40% of the company and the Kenyan government owns 35%.
Safaricom also operates a mobile-payment and finance service called M-Pesa, which Arsta called the “dominant” mobile financial system in the country, which “even holds customer deposits.” That is a critical function in a traditionally underbanked economy.
NMC HealthShares of NMC Health NMC, +1.67% of the United Arab Emirates are traded in London.
The company runs hospitals and provides other health-care services. “There is not too much special about them except for being very good at what they do and being in an area that needs their services,” Arsta said, adding that it has been “a fantastic investment for us.”
Top GloveTop Glove TOPGLOV, +0.38% TOPGLOV, +0.38% TGLVY, +2.93% is based in Malaysia and is the world’s largest manufacturer of rubber gloves. It was the largest holding of the Motley Fool Emerging Markets Fund as of June 30.
“Statistically, they like to say in their investor presentations that the per-capita consumption of rubber gloves in the U.S. is 150 per year, and for all of Asia it is 11 gloves per year,” Arsta said. Those numbers speak for themselves and imply tremendous potential for growth over a very long period.
“Use in quick-service restaurants, for example, is almost nonexistent in various emerging markets,” Arsta said.
Fund performance and holdingsHere’s how the Motley Fool Emerging Markets Fund has performed against the MSCI Emerging Markets Index after annual expenses, which are currently 1.15% of assets, an amount considered “below average” by Morningstar for its Diversified Emerging Markets category:
Total return - 2018 through Aug. 17 Average annual return - 3 years Average annual return - 5 years Motley Fool Emerging Markets Fund -3.7% 6.9% 3.6% MSCI Emerging Markets Index (U.S. Dollars) -4.7% 9.1% 4.1% Sources: Morningstar Direct, FactSet(Figures for these periods weren’t available for the Morningstar Diversified Emerging Markets category on Aug. 20.)
Here are the largest 10 holdings of the fund (of 32) as of Jun 30:
Company Ticker Country Industry Share of fund Total return - 2018 through Aug. 17 Total return - 3 years Total return - 5 years Top Glove Corp. Bhd. TOPGLOV, +0.38% Malaysia Medical Specialties 6.2% 32% 195% 269% NMC Health PLC NMC, +1.67% United Arab Emirates Hospital/Nursing Management 6.1% 41% 444% 1200% Tencent Holdings Ltd. 0700, +4.09% China Internet Software/Services 5.9% -17% 139% 365% Douzone Bizon CO. 012510, -2.26% South Korea Metal Fabrication 5.5% 59% 145% 384% Alibaba Group Holding Ltd. ADR BABA, +2.03% China Internet Retail 4.4% 0% 130% N/A Credicorp Ltd. BAP, +0.49% Peru Regional Banks 4.4% 9% 110% 93% Yum China Holdings Inc. YUMC, +0.84% China Restaurants 4.3% -12% N/A N/A MercadoLibre Inc. MELI, -1.08% Argentina Internet Software/Services 4.3% 3% 170% 171% Ctrip.com International Ltd. ADR CTRP, +0.75% China Other Consumer Services 4.1% -13% 6% 67% PT Mitra Adiperkasa Tbk MAPI, +3.77% Indonesia Department Stores 3.8% 29% 74% 38%Don’t miss: Fund manager ‘nibbles’ on international stocks hurt amid crises in Turkey, Argentina
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