Ever since the great crash of 2008, when emerging markets plummeted more than 50%, one strategy has jumped in popularity: buying multinationals to play the fast-growing markets. Giants like Coca-Cola rarely collapse like their developing markets-based competitors. They sell into all the hottest markets such as Brazil, India, and China. And nowadays, multinational CEOs seem to begin every conversation with a story about these far-flung markets.
Goldman Sachs strategists came out with an endorsement two years ago. They composed two baskets of stocks and called them the BRICs Nifty 50. One includes emerging market companies; the other has multinationals with exposure to emerging markets. The strategists concluded that you could hop back and forth between the baskets, depending which stocks offered better relative value or growth prospects. And over the past five years, both groups have risen nicely.
But now, with European economies in shambles and the U.S. undergoing a slow recovery, investors are turning that wisdom on its head. The myth of multinationals, says Robert Holderith, founder of Emerging Global Advisors, is that they provide investors an alternative path into explosive growth markets. The truth is that when you buy multinationals for emerging markets, you also buy their sagging developed markets businesses. "It's too watered down," he argues.
Holderith's point is that emerging market success stories from companies like Yum! Brands and Coca-Cola (KO) have blinded investors. Take Yum (YUM), parent company of fast-food restaurants including KFC and Taco Bell. Over the past five years, its sales in China have grown by 20% annually. "And we're just on the ground floor of growth in China," reads its latest annual report.
The problem is that in the same time frame, Yum's U.S. sales fell by 6% annually -- from $5.6 billion to $4.1 billion. The overall result: a middling, single-digit sales growth rate. Yum shares have rocketed upward. But in the future can you trust its overseas growth to make up for its slowing home market? Moreover, can you consistently pick the best multinationals?