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Cashing in on emerging markets

An ETF focussing on firms selling goods to the emerging market consumer.

What can be regarded as one of the single greatest investment trends in the last half century, the rise of the emerging market consumer certainly appears to show no signs of stopping. Relative peace – the so-called democracy dividend – and the embrace of capitalism as a means of lifting people out of poverty have all empowered hundreds of millions of consumers to pursue more prosperous lives.  

According to the IMF, emerging markets now account for 86% of the world’s population, and in the last decade alone, their wealth has increased five-fold. Brandes Investment Partners notes growth in emerging market economies (6%) should be at least double that of the developed world (2.4%) through 2017. This all provides a strong platform on which to build an investment product.

The iShares MSCI Emerging Markets Consumer Discretionary ETF is unlike other ETFs which focus on companies in a particular sector. By contrast, this ETF focusses on including firms selling goods to the emerging market consumer. Naturally, most of the companies are based or listed in emerging markets: South Korea, South Africa, China, India and Taiwan together account for 75% of the 93 constituents of the product.

At 15%, local investors will be familiar with the ETF’s largest holding – Naspers. Other recognisable names include Hyundai (7%), Tata (1.9%), and LG Electronics (1.59%). Those names should give you a good idea of the types of products and services they supply.

With emerging market currencies prone to being more volatile, large swings in performance are the norm. This ETF is listed on the Nasdaq Stock Exchange, and has posted the following performance figures: 

Annualised performance 1 year 3 years 5 years
iShares MSCI Emerging Markets Discretionary -0.44% 2.43%
       
Total expense ratio (TER): 0.69%    
Net assets ($’m): 5.20     

As can be seen from the table, the product has not been around long. The average price earnings and price to book ratio of constituent companies stands at 28.9 and 4.63, which appears to look quite expensive. But this is for a reason: the higher economic growth rates seen in emerging markets allow companies operating there to grow earnings more quickly, which goes some way in justifying the valuation.

Investors in the ETF will receive the benefit of a highly diversified portfolio – across company, currency and country, which costs a fraction of what it would cost an investor to implement on their own.

** This is a sponsored education series focused on offshore investing. The content is sponsored by Standard Bank Webtrader and Moneyweb are the content creator.

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