Avoid emerging markets thrills, spills: Try indirect exposure

By Sonali Verma
Globe Investor Magazine Online, June 24, 2008

If you haven’t got the stomach to ride the roller coaster of emerging markets, take heart: You can get indirect exposure to countries such as China through common North American and European equities that you might already own.

In fact, you probably already have more than you realize. Some of our most familiar brands rely heavily on China – Coca-Cola Co., McDonald’s Corp., PepsiCo Corp., LVMH Moet-Hennessy, FedEx Corp., Boeing Co., and Wal-Mart Corp., to name just a few.

Yum Brands, the parent of Pizza Hut, introduced franchised pizza to the Chinese in 1990. Same-store sales at Yum’s KFC, Taco Bell and Pizza Hut restaurants have been flat in the United States, while earnings have been rising in double digits from their operations in China. Yum made more than $375-million (U.S.) from its China division last year. Its profit from all other restaurants combined was about $480-million.

McDonald’s is anticipating a larger Chinese appetite as well. As Beijing prepares for the Olympic Games this summer, McDonald’s plans to almost double its outlets in China to 1,000. It has already tied up with China Petroleum and Chemical Corp., the country’s largest oil refiner, to open drive-through restaurants at gas stations.

And if you’d like a drink with your fries, Coca Cola and Pepsi are facing off in the Middle Kingdom, too. Coca Cola, which has been in China for more than 80 years, considers the country its largest market after the United States, Mexico and Brazil. China will probably leapfrog to the top spot within about seven years, the company says.

Pepsi has even stepped away from its trademark blue packaging and gone so far as to launch a red cola can in China, its second-largest market, in what it calls a tribute to the national flag.

Paris-based LVMH, the world’s largest luxury-goods group, sold more Louis Vuitton bags, shoes and gloves in China than it did in Europe. More than half its sales came from China, compared to about a quarter from Europe. The Louis Vuitton brand is the group’s most profitable business.

LVMH’s profit rose 8 per cent last year, shored up by revenue from emerging markets, and chief executive Bernard Arnault said a U.S. recession would have a “limited” or even “non-existent impact” because the group served affluent customers in countries where growth would remain strong. Rivals such as Tiffany & Co. and Coach, which sell mostly in the United States, have both reported declining sales.

At the other end of the shopping spectrum lies another company that is now synonymous with the phrase “Made in China” – Wal-Mart, which spends as much as $25-billion on Chinese goods annually.

“If Wal-Mart were a country, it would be China’s sixth-largest export market,” Princeton University professor Burton Malkiel wrote in his latest book, From Wall Street to the Great Wall: How Investors Can Profit from China’s Booming Economy.

“For the white-knuckle crowd, who see the potential growth of China but do not dare to stray from those local investments with which they are most comfortable, the indirect off-shore method has much to recommend it,” said Mr. Malkiel, who also wrote A Random Walk Down Wall Street.

Another way of cashing in on growth in China is by buying commodities, said Jim Rogers, who co-founded the Quantum Fund with another famed investor, George Soros. China is the world’s biggest consumer of nickel, copper, iron ore, coal, grain and meat, and the second-largest consumer of oil.

“When you buy commodities, you don’t have to worry about corporate governance, stock markets, regulations, government controls, or anything,” Mr. Rogers said in an interview from his base in Singapore. “The supply of all commodities is under duress and will continue to be so.”

Mr. Rogers added he is more concerned about the availability of agricultural commodities than oil.

Boeing and Airbus Industrie are also likely to benefit from Chinese demand. China will need to buy more than 2,000 commercial aircraft over the next 20 years as its airlines expand. Total domestic airline traffic will rise to more than half the size of the North American market, compared with a fifth at present, according to Boeing. Other transportation companies, such as FedEx, are also investing heavily in China, where about $120-billion in cargo is flown in and out every year.

Special to The Globe and Mail