Emerging markets are set to power global growth in the decades to come. These markets will consume more natural resources, such as the iron ore mined by Rio Tinto (LSE: RIO). Their increasingly affluent populations will spend more money on the kinds of foods, household cleaning and personal products that are made by Unilever (LSE: ULVR). And demand for the sort of business and personal banking services provided by Standard Chartered (LSE: STAN) will rise.
So is now a good time to invest in three companies with exposure to the world’s fastest-growing markets?
Let’s begin with some valuations, based on current-year forecast earnings and dividends.
Until recently, Standard Chartered had been the growth powerhouse of the big FTSE 100 banks. The company’s emerging markets exposure was behind the super-strong growth. Standard Chartered earns about 70% of its operating income from Asia (of which 30% is from China), with less than 10% of the remainder coming from mature Western markets.
However, Standard Chartered is set to report a third consecutive year of declining earnings. Challenging industry trading conditions in Asia have been part of the trouble, but management of the bank has also come in for criticism. Indeed, chief executive Peter Sands is about to step down after an eight-year tenure.
The current crisis at Standard Chartered means the company is trading on a relatively low price-to-earnings (P/E) ratio. I think investors could see a good long-term return from this rating, although there could be short-term pain, including a dividend cut.
Rio Tinto has the same level of exposure to Asia (about 70%) as Standard Chartered, but with a somewhat higher proportion coming from China (38% versus the bank’s 30%). The remainder of Rio Tinto’s revenue comes largely from mature Western markets, in contrast to Standard Chartered’s, but emerging economies are clearly the main driver for the miner’s growth.
Rio Tinto’s earnings are currently suffering from a low ebb in the commodities cycle, but not from the kind of internal company issues Standard Chartered is wrestling with. The miner’s P/E of 16.8 is relatively high, but analysts are expecting a return to earnings growth next year, bringing the P/E down to a more attractive 13.8.
It’s possible that subdued metals prices could drag on for some time, but with Rio Tinto yielding a chunky 5.1%, reinvesting dividends could meaningfully boost your returns when the commodities cycle does move to a more favourable phase.
While banking and mining are distinctly cyclical businesses — where there are periods of feast and famine — Unilever’s business is less affected by external macro-economic swings.
Unilever doesn’t provide a detailed geographical breakdown of revenue, but tells us that 57% comes from global emerging markets, and that the only single country accounting for more than 10% of total group revenue is the USA (14%). Average annual revenue growth of 9% over the past five years from emerging markets has boosted Unilever’s overall performance.
The combination of a defensive business and wide geographical diversification has been attractive for investors in a world where many industries have been struggling for growth. As such, the shares have been very much in demand, as you can tell by the high P/E of 21.4 and modest dividend yield of 3.1%. Unilever could deliver decent long-term returns from this level, due to its emerging markets growth, but, ideally, I’d be looking for an opportunity to buy at a somewhat lower price.
G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.