With Chinese GDP growth slowing down, investors may understandably be concerned about the prospects for companies that rely on emerging markets and the Asian economy for their sales and profits. After all, the region has become a major source of demand for a range of commodities and consumer goods in recent years, so a slowdown there is likely to hurt the prospects for a number of UK-listed companies.
For example, consumer goods company Unilever (LSE: ULVR) derives around 60% of its revenue from emerging economies such as China and, in recent years, has made no secret of its pivot to the East. Similarly, luxury lifestyle brand Jimmy Choo (LSE: CHOO) is one of the companies benefitting from the emerging middle class in China, with its strategy centred on diversifying away from shoes and also on tapping into increasing wealth across the developing world. Meanwhile, diversified mining company Anglo American (LSE: AAL) is reliant upon increasing demand for coal, iron ore and precious metals from China in order to deliver improving returns for its shareholders.
Despite the doubts surrounding Chinese growth, the three companies mentioned above still offer compelling investment cases. A key reason for this is that China continues to deliver growth that is many times greater than that offered by the developed world. For example, while the UK’s economy was viewed as performing relatively well in 2014, its GDP growth rate of 2.6% was still less than a third that of China. As such, Chinese growth may prove to be lower than anticipated by a number of investors, but for companies operating in the region it is still likely to mean higher sales and higher profitability than in the developed world.
Furthermore, the three companies discussed are expected to post impressive profit growth figures over the next couple of years. For example, Unilever’s bottom line is forecast to rise by 10% in the current year and by a further 7% next year. If it were to meet both of these expected growth rates, it would represent the best performance by the business (in terms of earnings growth) since 2010. And, with the company’s shares having risen by 50% in the last five years, such growth rates could be sufficient to cause investor sentiment to improve over the medium term.
Similarly, Jimmy Choo is forecast to post a rise in its bottom line of 11% this year and a further 24% next year. This rate of growth is considerably higher than many of its luxury brand peers and shows that its strategy of moving into new product lines could more than offset any slowdown in growth from China. Furthermore, with Jimmy Choo trading on a price to earnings growth (PEG) ratio of just 0.8, its shares look set to deliver strong capital gains after a somewhat mediocre performance since their IPO last year.
Meanwhile, Anglo American continues to struggle with lower commodity prices and, in the short run, investors must be realistic in terms of there being a good chance that things could get worse before they get better. However, Anglo American remains a top notch income play, with its yield standing at a whopping 7.4% and being expected to be covered 1.4 times by profit next year, thereby showing that a dividend cut will probably be avoided. In addition, Anglo American trades on a price to book (P/B) ratio of just 0.5, which shows there is a very wide margin of safety on offer and makes the company’s risk/reward ratio seem hugely appealing at the present time.
