There are many approaches to gaining exposure to an investment area of interest. A common, often over-looked or under-utilized approach is through the backdoor. As an example, people that want to ride the Apple computer company tidal wave could invest in the companies that supply the “guts” of Apple’s products. Or, investors that want exposure to steel could invest in coal, or coke companies (or even railroads).
Sometimes backdoor investing is all an investor will do, while other times investors are forced to find the backdoor. Consider the fundamentals for directly investing in emerging market stocks appears to be dwindling. On the other hand, the story of growth in emerging markets is still intact. How can this be? Thanks to the low interest rates, and vast amount of money being printed by western governments, we are seeing inflationary pressures, significant rises in foreign capital flooding emerging markets, and currency money business. All of the above are potential negatives for the stocks of these fast moving economies. This does not mean that these countries are growing slower; it just means they are trying to stay competitive and control their economies.
The backdoor to the emerging markets is through western companies that generate significant revenue from these countries. One example of a backdoor to emerging markets is the SPDR Industrial ETF (ticker (XLI). Below you will find brief snippets from the top 10 holdings of XLI. The info is from either annual reports of these companies, or public statements from the companies.
- General Electric – Today we have a $38 billion business in growth markets, which include resource- and people-rich regions, like the Middle East, Latin America, China and India. This represents about 40% of our industrial revenue. These markets are investing trillions of dollars in infrastructure and favor a multi-business company that can bring solutions. This allows us to form a “company-to-country” approach in countries where government and business work together to solve infrastructure needs.
- United Technologies – Hayes (CEO) says that of the company’s projected $54 billion in total revenue for 2010, nearly 20 percent will come from emerging markets — almost double its share in 2000. “Think about where growth is going to come over the next ten years: gross domestic product growth is relatively modest in Western Europe and the U.S., but GDP growth is around 6 or 7 percent in emerging markets,” he points out. “We are very well positioned to more than double our emerging-markets revenue over the next ten years.”
- United Parcel Services – Operates in 200 countries and is establishing footholds now in Turkey, Malaysia, Indonesia, and Vietnam.
- Caterpillar – That effort paid off too, as evidenced at the company’s recent shareholder meeting in Chicago. There, outgoing CEO Jim Owens showed a chart of international sales over the last seven years. Back then, the business relied on emerging markets for a third of its revenue in 2003. Today, they account for two-thirds. No wonder CAT has a bullish view of 2011, with sales expectations of $38 billion to $42 billion. Most of that, they believe, will come from the emerging world. In fact, the company expects non-U.S. markets to produce at least $25-$28 billion of that. And that’s pretty darn close to the $32 billion it managed last year.
- 3M – The most obvious area for future growth of 3M is in its international operations. 3M does well internationally now, with 63% of 2007 revenue coming from areas outside the US. Even with these strong international sales, 3M is looking to expand even more outside the US, with 70% international revenue expected by 2010. 3M is focusing specifically on emerging markets, such as Latin America, Eastern Europe, and China, in which sales have been growing at an average of 20% over the last five years. In fact, nearly 30% of total revenue, or $7 billion, comes from these emerging markets.
- Boeing – New plane demand from for planes from 2010-2029 total 30,900. Of that total, look at the breakdown by region: Asia Pacific 10,320, Latin America 2,180, Russian Federation 960, Africa 710.
- Union Pacific Railways – UP is the railway taking coal and coke out of Wyoming’s South Powder River. The demand for this coal is worldwide and much demand comes from China and other emerging nations. In addition to coal, UP’s revenue comes from many areas that are in high demand overseas such as Energy 22% of revenue, Agricultural 19% and Chemicals 15%.
- Emerson Electronics – We continue to globalize assets, generating 55 percent of revenue outside the United States in 2009. We launched new shared services, engineering and technology centers in China, Japan, the Middle East and Mexico. We are making substantial infrastructure investments in emerging markets, which are expected to lead the global recovery. Our sales in emerging markets now represent 32 percent of total revenue. We are well positioned for significant growth in emerging markets with a near-term goal of 40 percent of total revenue in these key growth markets.
- Honeywell -50% of revenue from overseas and emerging market expansion is the number one effort due to demand.
- Deere – Last year, in spite of weakness in Europe, sales outside the U.S. and Canada increased 14 percent and represented about 35 percent of the company total. The strategic plan targets roughly half of the company’s sales coming from outside the U.S. and Canada by 2018, versus about one-third today.
If you would like to schedule a free consultation to have your investment portfolio reviewed, please give me a call at 913.693.7918, or email me at [email protected].
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