Blue-chip companies listed on the FTSE 100 have poured into emerging markets in recent years. Now these companies’ shares are being hit
Investors fearful about the impact of the emerging-markets crisis on their portfolio may be shocked to discover they have more exposure to a meltdown than they think.
Blue-chip companies listed on the FTSE 100 have poured into China and other emerging markets in recent years in a bid to grab the exciting growth opportunities on offer. As the sentiment toward those regions sours, these companies’ shares are being hit.
If you have an emerging markets fund, you have a pretty good idea what your exposure is. But plenty of big-name British companies and funds are also in the firing line, given that FTSE 100 companies now generate 33pc of their profits from emerging markets.
Companies on the American S&P 500 Index, by comparison, generate only 5pc of their revenues from emerging markets.
This leaves investors with FTSE 100 stocks, index-tracking and actively managed funds with a much higher exposure than they may think.
Last week, investors in spirits company Diageo (LSE: DGE.L – news) were feeling punch-drunk after its share price fell more than 6pc in just two days, on slowing sales in China and Nigeria. As a result, Goldman Sachs (NYSE: GS-PB – news) dropped Diageo from its “buy” list and downgraded it to neutral.
Profits at Unilever (NYSE: UL – news) , which makes a vast range of goods from PG Tips to Peperami, have been hit by slower demand and weaker currencies in Brazil, India, Russia and Indonesia. A fall in local currencies means the sales made there result in fewer pounds being bought back for British shareholders.
HSBC and Standard Chartered (HKSE: 2888.HK – news) , two FTSE-listed stocks with hefty exposure to Hong Kong and mainland China, have also struggled. The crisis came to head this week with investors withdrawing billions of dollars from emerging-market funds in the biggest sell-off since August 2011.
Markets have been hit by fears of a China slowdown, and the US Federal Reserve’s decision to scale down “quantitative easing” (QE). Instead of flowing into emerging markets, money is being attracted back on the hope of improving rates in America. Brazil, India, Turkey and South Africa have raised rates to protect their currencies.
The FTSE 100 has shed £93bn of value since January 21, with much of those losses down to emerging markets, said Elaine Coverley, head of equity research at wealth manager Brewin Dolphin (LSE: BRW.L – news) . “Emerging-market headwinds show few signs of dropping. We have been bearish for some time and continue to be so, although we don’t see the current correction turning into a full-blown crisis.”
Some FTSE 100 stocks could be hit hard, she said. “Global brewer SABMiller (LSE: SAB.L – news) is one of the most exposed stocks of all because it generates a mighty 85pc of its sales from Eastern Europe, Latin America, Africa and Asia.
“I’m a bit more bullish about Diageo (Berlin: GUI.BE – news) [which makes 50pc from emerging markets]. Falling sales in China and Thailand have been offset by a 5pc rise at its US spirits division, which is the largest part of its business.”
South Africa’s currency has slumped
Unilever earns about 40pc of its revenues from these fast-growing regions but Ms Coverley is impressed with how it is improving its profit margins compared to rivals. This has been done through restructuring the business, buying new firms and selling some poor performing food businesses.
FTSE mining giants such as BHP Billiton (NYSE: BBL – news) and Rio Tinto (Xetra: 855018 – news) look vulnerable to a crisis in China, the world’s biggest consumer of metals such as copper and iron ore.
Even the banks that have performed relatively well in the crisis years are being tested. “Standard Chartered’s share price has fallen 25pc in the past year, but we remain positive about the stock, because of its top-quality management.,” said Ms Coverley. She also raised concerns about the valuation of HSBC shares given a rise in bad debts in Asia.
Jeremy Batstone-Carr, head of private client research at stockbroker Charles Stanley (Shenzhen: 002588.SZ – news) , said with 55pc exposure, British American Tobacco (LSE: BATS.L – news) (BAT) was closely tied to emerging-market fortunes. “BAT has traditionally been seen as a defensive stock in tough times, but it has been hit by the clampdown on smokers in developed markets. Now China has followed, by moving to enforce a nationwide ban on smoking in public places.”
The big question was what happens next, he said. “The crisis has blown up quickly, and it could blow over just as rapidly. But if it drags on, the contagion could eventually hit Western stock markets.”
Reports of a crisis had been overblown, said Gemma Godfrey, head of investment strategy at wealth manager Brooks Macdonald. “Countries such as Argentina, Turkey and the Ukraine are in serious trouble, but these are unlikely to have a major impact on your portfolio.
On a positive note, emerging markets are good value compared with long-term averages. A list of the cheapest is published at telegraph.co.uk/investing .
Ms Godfrey added: “I’m optimistic about China. In the short term, it will take a hit, as the Chinese authorities try to rein in the credit bubble. But they have plenty of firepower at their disposal, and if they get their policy right, they can control it.”
= EMERGING MARKETS FUND TIPS =
= Should the brave be buying? =
Some investors may want to trim their direct exposure to emerging markets by selling off funds and shares, but others spot buying opportunities. Ben Whitmore, fund manager at Jupiter, pointed out last week that Standard Chartered the FTSE-listed bank with substantial emerging market operations is for the first time cheaper than Lloyds Banking Group, when the share price of each is compared with its profits, the so-called price-to-earnings ratio.
He is actively looking for value opportunities thrown up by the turmoil: “Being greedy, my hope is for more.”
For private investors aiming to keep a certain proportion of their overall portfolio in emerging markets, now could be the time to top up holdings gently.
Funds favoured by advisers include Allianz China (for a single-country focus) or Mirabaud Global Emerging Markets, First State Asia Pacific Leaders and Newton Emerging Income for a wider exposure.
Away from Asia, investors are seeking value in Eastern Europe and other developing markets such as those in Africa. Here, widely respected funds offering exposure include Charlemagne Magna New Frontiers, Franklin Templeton Frontier Markets and JM Finn Global Opportunities.
Tim Cockerill, investment director at wealth managers Rowan Dartington, said: “The long-term drivers of growth, such as young and dynamic populations and high savings rates, are still in place. Nobody knows if the crisis will worsen, and markets have a habit of surprising us. You might see this as an opportunity to pick up quality stocks or funds at today’s lower prices.”