If Brexit has you spooked about investing internationally, you can still gain global exposure from many U.S.-listed multinationals.
That’s a strategy Ron Weiner, managing director and partner with RDM Financial Group at Chicago-based HighTower Advisors, has been pursuing for his clients since 2009, favoring stability over the potentially more rewarding but more volatile method of gaining exposure to emerging markets by investing in them directly.
“We opted to have more certainty by just being in the U.S.,” he says. “We were willing to accept lower returns for stability.”
In addition to liquidity, it makes sense to invest in emerging markets through U.S. multinationals given that they are in a known regulatory environment, with sound capital markets and attractive governance, says James Anderson, managing principal with New Jersey-based Tierra Funds.
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Emerging markets are attractive growth areas as their younger demographics can mean demand — for housing, for instance — is exceeding supply more than in developed markets, Anderson says.
“Emerging markets are attractive because growth across many sectors is going to remain strong,” he says.
That growth is coming even as developed market growth is more sluggish, says Jay Jacobs, director of research with New York-based Global X Funds. For a portfolio of 60 percent equities and 40 percent bonds, investors seeking growth could put 8 to 10 percent in emerging markets, he says.
There are two ways of getting exposure to emerging markets, with pros and cons to each.
One way is to invest in local securities, which offer greater potential growth and diversification, Jacobs says. But most retail investors would have to use exchange-traded funds because they wouldn’t have the ability to invest directly.
The second way is to invest in multinational companies that derive a significant portion of their revenues abroad, he says. This can be difficult because it takes more research, and companies don’t always break out their percentage of revenues coming from emerging markets, Jacobs says.
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Of course, playing emerging markets this way give investors less purity of exposure, Jacobs says. For investors already owning a lot of these types of equities, overweighting them probably doesn’t change their portfolio’s emerging market exposure much.
The downside from an emerging market standpoint is that investors are getting a diversified multinational with perhaps only 10 percent exposure to emerging markets, Anderson says. However, that same diversification that keeps appreciation in check when markets are hot also offers lower volatility.
While the American middle class may not be the growth engine it once was, the real bull story is growth in the middle class globally, Weiner says. “It’s about the growing middle class consumer around the planet. You’re leveraging the foreign consumer.”
That trend benefits companies like PepsiCo (ticker: PEP), Procter & Gamble Co. (PG), Johnson & Johnson (JNJ), Kimberly Clark Corp. (KMB), Colgate-Palmolive Co. (CL), Microsoft Corp. (MSFT) and Alphabet (GOOG, GOOGL), he says, adding that he thinks management is smart enough to find out where the growth is.
Jacobs points to social media companies, whose scalability has allowed them to penetrate emerging markets more efficiently than industrial companies. Anderson likes defense and aerospace as ways of playing emerging markets in Southeast Asia and the Middle East.
Other companies for investors to consider include:
eBay (EBAY). Jacobs points to this internet commerce company as an example of a domestic company investors could use to tap into foreign markets. The company reported that more than 57 percent of its net revenues came from outside the U.S. in 2015. Its shares are down 13.5 percent for the year.
Clorox Co. (CLX). On the consumer side, Anderson points to companies with strong footholds in Asia and Latin America, such as consumer products manufacturer Clorox. The company generates about 20 percent of its revenues internationally, and its shares are up 9 percent since Jan. 1.
Apple (AAPL). Anderson also believes Apple will benefit as its iOS operating system for mobile devices will be able to ramp up well in emerging markets like India, Mexico and Brazil and compete with cheaper and more prevalent devices run on the Android operating system. The company’s international net sales accounted for 65 percent of total net sales last year. Its shares are down 9.2 percent this year.
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International Business Machines Corp. (IBM). Anderson also likes IBM because he thinks its Watson technology platform has a lot of potential, especially in the health care sector. IBM operates in more than 175 countries. Its shares are up 10.3 this year.
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How to Invest in Emerging Markets With Large-Cap Stocks originally appeared on usnews.com
