Pent-up consumer demand is creating investment opportunities across emerging markets, says Alice Popescu, a vice-president and portfolio manager at Westwood International Advisors Inc. in Toronto.
"One factor is the rise of data and communications," says Popescu, who specializes globally in the consumer-discretionary sector. "Everybody is hearing about smartphones, the penetration of handsets, and mobile data and services across emerging markets."
As people have more discretionary income, says Popescu, consumption grows. First, households will own their first phone, and in some cases two. From there, consumers will seek texting capabilities and other smartphone services such as email, she adds.
A bottom-up stock picker, Popescu sees opportunities in hardware companies such as Taiwan Semiconductor Manufacturing Co. Ltd., which is among the top holdings in Westwood Emerging Markets. They contribute to the hardware manufacturers across the supply chain, says Popescu, which eventually services both Apple Inc. (AAPL) and Samsung Electronics Co. Ltd. handsets, "which have seen a tremendous rise in demand."
Popescu says Taiwan Semiconductor also exhibits excellent fundamentals in terms of balance-sheet quality, a business model with a proven track record, and ability to generate free cash flow. "These are the key elements for us in investing," she adds. Companies that she favours are emerging-market players in the consumer space whose businesses are also feeding into those bigger, global trends.
Popescu, whose fund's holdings include Kasikornbank Public Co. Ltd. in Thailand, also cites investment opportunities in retail banking. "Bank facilities are a consumption trend," she says, "because it's really the opportunity to have higher wages and invest those wages in various areas of consumption, such as housing, transportation, and in many cases, retail."
Popescu says many banking companies facilitate growth in retail banking by introducing an average consumer to a bank account, and then a savings account. This then allows some individuals to obtain credit and purchase their first motorcycle, a popular mode of transportation.
Examples of country trends affecting the consumer sector in emerging markets include:
Consumer comeback in China. Despite the economic slowdown in China -- the biggest emerging market -- Popescu says consumption is starting to make a comeback. Chinese consumers "have a significant amount of savings to set free," she says. E-commerce, for example, is an area where consumption has been "very, very strong."
Globalization in South Africa. Despite some outward appearances, South Africa illustrates a continent full of consumers. "In a township outside of Cape Town or Johannesburg, many people live in huts," says Popescu, "but they have cars, they wear brand-name T-shirts, and they have at least one cell phone." There are many countries like this and they want to propagate some economic growth to support their desire to realign themselves to the global consumer, she adds.
Positive growth dynamics in Turkey. "Turkey is a very young country with a lot of opportunities ahead," says Popescu. "You just need to see the proper economic growth that will create sustainable jobs for the rising population."
Building boom in the Philippines. The positive dynamics, says Popescu, include a "tremendous amount of infrastructure spending," which will create jobs and generate further income consumption, and government incentives to promote tourism. A recent research trip by Popescu included a visit to the largest real-estate developer in the Philippines, "which really captures this growing trend for housing, presenting an attractive middle-and-long-term investment."
When it comes to valuations, "emerging markets are still inherently attractive, they're cheap and they offer much stronger growth rates," says Popescu. "Emerging-markets economies continue to own all the attributes for sustainably higher levels of growth."
These attributes, she says, include favourable demographics, natural resources, a growing appetite for consumption, accumulated cash savings and maturing political establishments.
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