Pity the multinational. Geographic diversification looks good when markets beyond Europe and the United States are rising stars, but the strategy doesn't look so good when those same markets are struggling.
And right now, emerging markets are Fear No. 1 among investors. Currencies are down sharply, pushing central banks in Turkey, South Africa and India to raise interest rates to levels that threaten their economic growth. The list of countries raising rates is likely to grow.
Stock prices are reflecting turmoil among a far wider range of countries. The iShares MSCI Emerging Markets exchange-traded fund, which provides exposure to countries such as Brazil, China, South Korea, Russia, Mexico and Indonesia, has fallen nearly 9 per cent this year.
According to Bloomberg News, $7-billion (U.S.) was pulled out of emerging market ETFs in January, marking the biggest outflow since the securities were created.
But multinationals have been taking a similar beating. These companies have been widely touted as ideal plays on emerging markets because they deliver exposure to fast-growing economies but are managed and regulated according to developed-market standards.
Now, though, their exposure to emerging markets is dragging them down. Procter & Gamble Co., the world's largest consumer-products company, has fallen 5 per cent this year and is down nearly 10 per cent over the past two months.
Its latest quarterly results, released last week, topped analysts' estimates and showed an 8-per-cent rise in sales derived from developing economies. But weaker currencies and rising interest rates are skewering confidence in the company's forward guidance. More than 40 per cent of Procter & Gamble's revenue comes from markets beyond North America and Europe.
Similarly, Starbucks Corp., which has been expanding into China, is down 8 per cent this year; Yum Brands Inc., which gets more than 50 per cent of its fast-food sales in China, is down 12 per cent; globally diversified Coca-Cola Co. is down nearly 8 per cent; and Potash Corp. of Saskatchewan Inc., which sells a lot of fertilizer to developing economies, has fallen 10 per cent over the past two weeks.
These are hardly catastrophic declines, but they are far bigger than declines seen in the broader U.S. market. The S&P 500, where overall sales to emerging markets stands at only 5 per cent, has fallen just 3 per cent from its high.
The declines among multinationals also reinforce the idea that emerging markets are looking like more of a concern than an opportunity right now.
So far, there is little consensus over whether the worst is behind us or if there is a bigger crisis brewing – though caution seems to be the watchword.
The World Bank recently warned that the withdrawal of monetary stimulus by the U.S. Federal Reserve could cause "abrupt adjustments" in developing economies; economist Paul Krugman noted in The New York Times on Thursday that Turkey's currency crisis comes with a political crisis as well, and there is risk of contagion among other countries; UBS strategist Geoff Dennis has a "fairly cautious view of EM equities at present," while Goldman Sachs strategists remain similarly "cautious" on emerging markets.
If the turbulence in emerging markets gets worse, it will likely continue to weigh on multinationals with exposure to them, given that these stocks haven't yet fallen into beaten-up territory.
Procter & Gamble is still up 15 per cent since the start of 2013 and trades at 19 times trailing earnings, which is pricey for a company that makes detergent and toothpaste.
In other words, multinationals with emerging market exposure may not be compelling buys just yet, but they're moving in the right direction. As fears grow, so do the opportunities.