A thoughtful investor I know asked whether focusing solely on the consumer in our EM strategy “was still appropriate” writes Mark Martyrossian


Given this is our exclusive focus it rather took me aback. Granted, our growth proposition has been under the hose for 18 months now (as has growth all around the world) with analysts cutting forecasts in the face of rising inflation and rates. Additionally, the almost frenzied pursuit of AI has seen what interest there has been in EM focus on tech names in Taiwan and Korea with consumption an also-ran. “Wouldn’t it make sense to give yourselves more flexibility to cover other sectors when you deem fit?” he asked.

Despite the headwinds of the last 18 months we remain committed to the EM consumer. Admittedly, there will be periods when the focus shifts elsewhere: in addition to those referred to in the previous paragraph, cast your minds back to Q1 2016 when semis and materials went on a toot, Q4 2016 when a reflationary trade saw banks (even dreary state-owned ones) accelerate, or Q4 2018 when Donald Trump declared trade war on China. But these periods, whilst challenging at the time are, when compared to the medium and long term, a mere blinking of the eye.

Just think about the fundamental changes wrought by the Industrial Revolution which began in the second half of the 1700s. It transformed the western world and saw Britain double its GDP per capita in 150 years and the USA accomplish the same feat in just 50 years. China and India have done the same in less than 20 years with much larger populations (over a billion each vs. 10 – 15 million in the UK and the USA). These stats prompted McKinsey to conclude that the Industrial Revolution “pales in comparison with the….advent of a new consuming class in emerging countries.”

In the last 20 years, the urbanisation of emerging markets has created sufficient wealth to more than double the ranks of the consuming class, to 2.4 billion people. McKinsey research shows that by 2025 this number will have nearly doubled again to 4.2 billion consumers out of a global population of 7.9 billion people. Further, annual consumption in emerging markets will rise to $30 trillion, up from $12 trillion in 2010, and account for nearly 50 percent of the world’s total, up from 32 percent in 2010.

There are few investors to whom I speak who do not acknowledge the potential of emerging markets. McKinsey have said the same for most of the CEOs of their multinational clients. Although both groups have a visceral optimism about the region, each point to difficulties in execution. The investors point to the pedestrian long-term performance of the EM indices. The CEOs to a number of factors that contrive to give an unfair advantage to the local players (see below). The result is that although EMs account for 36% of global GDP, their contribution to revenues of one hundred of the largest multinationals is a mere 17%.

In conclusion, EM consumption remains one of the most exciting secular trends open to investors. Execution however is not always trivial. For us, our process is fundamental; it is only companies that can satisfy the challenging 3x15s* that qualify for consideration. To investors who think we are making life hard for ourselves by concentrating solely on consumption we would say that, whilst painful on occasion, our lack of exposure to other sectors has not hampered long term performance. Few companies in other sectors meet the 3x15s hurdle rate and for those that do it is usually a transitory experience at the top of a cycle.

As to the observation from CEOs that local players seem to enjoy an advantage against their bigger international competitors, we would say two things: first, it has been ever thus (the protectionist tariffs in the US 1850-1930s) and secondly that is precisely why we focus exclusively on “local champions”.

*The 3x15s provide the foundation for our process: a minimum of 15% RoE; 15% Cash flow return on assets; and 15% profitability.

Mark Martyrossian  is Director and Head of Distribution at Aubrey Capital Management

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