This article is part of the Morningstar's Guide to Emerging Market Investing. Click here to find out just what an emerging market is and which regions hold the potential to boost your investment portfolio.
Are you a cautious investor? Don’t have the aptitude to stomach losses, your investment horizon is short or your goals set in stone? Emerging market equities are probably not the best fit for your portfolio.
But this does not mean you have to miss out on the growth prospects the region offers those with a higher risk threshold. More than 70% of the revenues of FTSE 100 companies come from outside of the UK. That means that cash coming into the company is sourced from other developed markets – and for an increasing number of stocks, emerging markets too.
We highlight three stocks that are listed in the UK – meaning a better level of corporate and shareholder governance – but source a sizable proportion of their revenues from emerging economies.
Standard Chartered (STAN)
Standard Chartered has its headquarters in the United Kingdom but operates almost exclusively in Asia, Africa, and the Middle East, says Morningstar’s banking equity analyst Erin Davis. Its biggest markets are India and Hong Kong, which combine to produce about 31% of the group's operating profits in 2013; Korea and other Asia Pacific, the Middle East, Singapore, Africa, and the rest of the world round out its portfolio. Its wholesale banking operations dominate, commanding about 75% of risk-weighted assets.
Standard Chartered's strategy is to continue to build out its network in Asia, Africa, and the Middle East, so its fortunes are closely tied to the economic health of these occasionally unstable regions. Competition is heating up in Asia, particularly in Hong Kong – one of Standard Chartered's biggest markets – and long-term profit margins could suffer.
Growth has slowed significantly in these markets, and Standard Chartered also faces headwinds as it pulls back from South Korea; we expect growth through at least 2015 to be below historical levels.
Rio Tinto (RIO)
Rio Tinto searches for and extracts a variety of minerals worldwide, with the heaviest concentrations in North America and Australia. Major products include aluminium, copper, diamonds, energy products, gold, industrial minerals, and iron ore. The 1995 merger of RTZ and CRA, via a dual-listed structure, created the present-day company. The two operate as a single business entity. Shareholders in each company have equivalent economic and voting rights in Rio as a whole.
Rio is a top-tier global miner along with BHP Billiton, Brazil's Vale, and U.K.-based Anglo American, says equity analyst Mark Taylor. A world-class asset base and capable management make Rio Tinto one of the few miners to earn more than its cost of capital through the commodity cycle. Geographic and product diversification give the company relatively stable cash flow and lower operating risk than many of its mining peers. Most revenue comes from the relative safe havens of Australia, North America, and Europe, though operations span half a dozen continents.
SABMiller (SAB)
SABMiller is the second-largest brewer in the world and has gone through a dramatic evolution since its beginnings as a provincial South African brewer, says Morningstar equity analyst Philip Gorham. The company controls roughly 14% of the global beer market, while operating such top brands as Snow, Miller, Peroni, Pilsner Urquell, and Grolsch. SABMiller has the number-one or number-two spot in more than 90% of the markets in which it competes. Altria holds a 27% stake in the firm.
Over the past few years, SABMiller has been one of the most compelling emerging markets stories in our consumer defensive coverage universe. It remains a strong business, with a wide moat based on its cost advantage in Africa and an impressive growth profile from its broad emerging markets presence, about 80% of earnings before tax. However, its margins lag those of local rival AmBev in the key emerging markets of Latin America, and we think there are structural barriers to the margin gap being closed in the medium term.
