Emerging markets at home

By Scott Cendrowski, reporter

(Fortune Magazine) -- It has become an investing truism of late: If you want stocks with high-octane potential, you're wise to invest in the fast-growing economies of emerging markets. The result has been frenzied demand for such stocks and skyrocketing valuations.

The MSCI Emerging Markets index has risen 67% in the past year, and China's main stock index now trades at a price/earnings ratio of 32, more than 50% higher than that of the S&P 500. Investors find themselves in a quandary: Yes, new economies have the richest potential, but who can afford those prices?

Some international stock managers have found an answer. They're buying shares of companies in established economies that have significant exposure to emerging markets. Giant multinationals like Siemens (SI), Unilever (UN), and Procter & Gamble (PG, Fortune 500) now get more than 30% of sales -- and their fastest growth -- from places like China, Brazil, and India.

"It's the best of both worlds," says Keith Walter of the Artio Global Equity Fund (BJGQX), whose 3.5% annualized return over the past five years beats developed-world stock funds by 1.4 percentage points. "The valuation is something you can stomach, and the Western economies themselves are improving."

There's another advantage: Stocks in developed-world companies typically have less risk and volatility. Don Gervais, who oversees $65 billion as global head of fundamental equity client portfolio management at Goldman Sachs Asset Management, notes that as the typical emerging-markets fund fell by 50% in 2008, Western companies with diverse exposures fared far better. "They tend to be able to weather the storms," says Gervais.

Walter of Artio Global suggests buying lower-priced European and U.S. stocks with significant operations in newer markets. Siemens, the $124 billion German conglomerate that sells everything from traffic-control systems to health-care products, is one of his top holdings. It garners 30% of sales from developing markets, and recent cost cuts helped Siemens beat earnings expectations by 64% last quarter. Its shares trade at 14 times next year's estimated earnings.

Rising energy demand in China, India, and other developing countries will benefit U.S.-based oil services giant Schlumberger (SLB), predicts Simon Hallett of Harding Loevner's International Equity Fund (HLMIX). "The oil exploration and production business is really characterized by declining production," he says. "So oil companies have been forced into offshore West Africa, Latin America, and Asia." Schlumberger trades at 22 times next year's earnings, below its five-year average of 25.

Finally, Jim Moffett, who runs the $5.1 billion Scout International Fund (UMBWX), last fall bought shares of Standard Chartered (SCBFF) because the London-based bank generates 90% of sales in Asia, Africa, and the Middle East but still trades at a reasonable 13 times next year's earnings. Like the other managers, Moffett, whose fund has beaten 92% of competitors in the past decade with returns of 4.6% a year, likes the mix of potential and reduced risk: "We'd rather participate in [broad growth] than bet on Chinese stocks."  To top of page

Just the hot list include
Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed3.80%3.88%
15 yr fixed3.20%3.23%
5/1 ARM3.84%3.88%
30 yr refi3.82%3.93%
15 yr refi3.20%3.23%
Rate data provided
by Bankrate.com
View rates in your area
Find personalized rates:
Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET


Bankrupt toy retailer tells bankruptcy court it is looking at possibly reviving the Toys 'R' Us and Babies 'R' Us brands. More

Land O'Lakes CEO Beth Ford charts her career path, from her first job to becoming the first openly gay CEO at a Fortune 500 company in an interview with CNN's Boss Files. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.