3 FTSE 100 shares set to gain from emerging market growth

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3 FTSE 100 shares set to gain from emerging market growth
Master Investor Magazine

Master Investor Magazine Issue 57

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Robert Stephens, CFA, discusses the investment potential of three global consumer goods companies.

The growth potential offered by emerging markets such as India and China is not a new investment idea. Nor is it without risk, as geopolitical uncertainty in China and its slowing rate of economic growth have shown over the past few years.

However, over the next decade the growth possibilities offered by the emerging world are expected to come more sharply into focus.

Rising wages could produce a tailwind for consumer goods companies such as Unilever (LON:ULVR), Diageo (LON:DGE) and Reckitt Benckiser (LON:RB). This could allow them to produce an improving financial performance, while offering UK investors a degree of diversity as domestic political and economic risks look set to remain heightened.

Emerging market potential

China and India’s economies are expected to grow at an annualised rate of over 6% during the next three years. This will help to propel them towards becoming the two largest economies in the world by 2030. China’s economy is forecast to be twice as large as the US economy at purchasing power parity (PPP) by 2030, while India’s economy is due to be 50% larger than that of the US within the next ten years.

By the end of the next decade, around 43% of the world’s middle-class consumers are forecast to live in India or China. Companies with significant exposure to either economy, as well as to another five emerging economies that are expected to be among the world’s ten largest by 2030, could experience rapid growth as consumption levels soar.

Investment opportunities

In Reckitt Benckiser’s case, its acquisition of Mead Johnson in 2017 increased its exposure to China. The company may also benefit from an ongoing restructuring that will lead to it having two distinct parts to its business: Health and Hygiene Home. This could improve its efficiency after what has been a mixed financial performance for the business, with short-term trading expected to remain volatile.

Unilever’s focus on sustainability could further enhance its financial prospects. It leverages its range of brands to help further social and environmental causes that resonate with consumers. In addition, the company is investing in direct-to-consumer channels to increase its customer loyalty, as well as to potentially enhance its margins. The stock’s forward price-earnings ratio of 21 may be justified by its long-term profit growth potential.

Master Investor Magazine

Master Investor Magazine Issue 57

Never miss an issue of Master Investor Magazine – sign-up now for free!

Read the latest Master Investor Magazine

Diageo has invested in emerging markets such as China and Nigeria over a long time period. It has rationalised its portfolio of brands to concentrate on its most profitable beverages that offer the greatest growth potential. Additionally, it is seeking to innovate its popular beverages to maintain their appeal as consumer tastes change. For example, using cleaner labels and offering experience-led opportunities could enhance its economic moat.

Outlook

At a time when growth opportunities in major economies may be somewhat limited, the emerging market growth story offers diversity and the potential for investors to profit. FTSE 100 companies such as Unilever, Diageo and Reckitt Benckiser appear to be well-placed to capitalise on the opportunity, and could outperform the wider index in the long run.

In addition, having exposure to companies that rely on non-UK markets for the majority of their sales and profitability may reduce risks for investors. The general election and Brexit may provide buying opportunities among some UK-focused sectors, but having exposure to long-term global growth trends may equally be a logical decision.

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