Investing in emerging markets: Multinationals vs. local

I am often asked why an investor should invest in local businesses in emerging markets instead of putting their money in large multinational companies. For example, why invest in Amorepacific Corp., a Korean cosmetics company, over Revlon, a multinational that derives a portion of its revenue from sales in emerging markets? This is a fair question, and as a long-term global investor, I will outline my thoughts on it in this blog post.

Know thy customer

In complex markets with different cultural, language and demographic characteristics, truly knowing the consumer is vital. I would argue that understanding and accurately meeting client needs is one of the more important factors in growing a sustainable business over time. Sure, huge multinationals do vast amounts of market research and operate successfully in emerging markets, but I believe that from a growth perspective, local companies are uniquely positioned to take advantage of the nuances within their home markets. This brings me to my second point – agility.

Be nimble, adapt

The ability to move quickly, enact change and react to shifting consumer desires is especially important in many emerging-market countries. Why? Because consumer society is changing very rapidly in countries like China. Companies that aren’t bogged down by complex global corporate structures are able to use their customer knowledge to move more quickly and provide the desired consumer experience. It sounds simple, but those who don’t have to report to headquarters in Cincinnati or London or elsewhere, can make decisions that can help them gain market share from the multinationals that may be operating in their industry – provided the management team in place is strong.

Improved governance

Investors often cite corporate governance as their rationale for investing in multinationals over local companies in emerging markets – based on the belief that multinationals will have better corporate governance and more trustworthy accounting. Many years ago, this was absolutely true. But in the last decade, I have seen a seismic shift in this regard. Local companies have watched, learned and are now engaging in many of the strategies used by the multinationals.

Is the governance situation perfect in all companies in all emerging markets? Absolutely not. But the improvements I’ve witnessed are substantial. Corporate governance is not something that keeps me awake at night. This is in part because of the improved situation in many of the markets we invest in, but it’s primarily because we are, and always have been, long-term investors that focus on in-depth company research. We cover all the data, meet the management team and study the competitors. This provides us with a level of confidence in a company that, I believe, eludes other emerging-market investors.

New vs. old emerging markets

I’ve written about what I refer to as “the new emerging markets” in the past, but I think it is important to mention again here, in the context of multinationals. I continue to see a misconception among investors about what it means to invest in these markets – specifically, that it must mean an investment in capital-intensive businesses such as mining, shipping or oil and gas. These types of business certainly remain a large part of many emerging-market economies, but there are many more investment opportunities available to investors.

It is my oft-stated view that the single most important factor in EM growth is demographics – the huge uptick in middle-class economic growth and this shift is the growth driver for a huge array of local, emerging-market companies in the consumer sectors. It is in these “new emerging markets” segments that we find opportunities, not in the “old emerging markets” areas.

If you have any questions about this blog post, or other topics, I am happy to answer them. Please leave any feedback in the comments area below.

Thank you for reading.