Daniel Arbess - 2010 Investment Strategy

Asian EM Consumers: Coiled Spring

Then, look for opportunities to be migrating even further downstream over time, closer to the EM consumer. For a glimpse of the future, check out Yum Brands’ (NYSE: YUM, $39.99/share, $18.69 billion MCAP) most recent 10Q: YUM’s operating profits in the United States fell by 9%, but China saved the quarter with a blistering 37% growth rate. China contributed 23% more profit than the United States in 1Q. YUM has 3,500 restaurants there and is growing internally by 1,400 a year, even while it closes 150 stores a year in the United States.

Sell What Emerging Markets Make Better

Don’t Forget to Sell What Emerging Markets Make Better. About 70% of all products now sold by Walmart are made in China. China has crushed U.S. manufacturing margins, by bidding up raw materials and selling finished products at everyday low China prices. We’re conceptually short labor-intensive, downstream Western producers, especially of the leveraged variety. We’ll eventually be long the debt capital structures of the few that can survive, giving us the next generation equity after inevitable balance sheet restructuring. Many of the best junk franchises were overleveraged to begin with. Now the triple whammy of falling margins, declining revenues and credit-constrained multiples has dropped valuations by half or more. There will be some great distressed debt opportunities, as the next $1 trillion of junk credit matures over the next five years.