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TheStreet Open House

Emerging Markets May Drag Consumer Staples Lower

Stocks in this article: WMTPGKOEEMVDC

NEW YORK ( TheStreet)--Emerging markets stocks have had a rough 2013, as a period of underperformance that started in late 2010 has accelerated. Investors and analysts want to minimize the obvious impact this trend will have on consumer staples companies such as The Procter & Gamble Company (PG), Wal-Mart Stores, Inc. (WMT) and The Coca-Cola Company (KO).

In Wal-Mart's latest fiscal year, for example, international sales generated about 29% of the total--a figure it expects to rise in future years. Much of that total comes from developing countries. The company's largest presence outside the U.S. is in Mexico, where it has more than 2,000 stores. It is also the number two retailer in China, according to The Wall Street Journal. The retail giant began operating in China in 1996. It reaffirmed its growth plans for China earlier this year following reports it was scaling back. But the company's results don't provide much detail about individual markets, so investors can only take them at their word--until something changes.

Likewise, Coca Cola is anything but concerned at the moment about emerging markets sales. In its latest annual report, Coke said its emerging and developing markets segments "are recovering from the global recession at a quicker pace" than developed markets.

But the performance of emerging markets indices is telling a different story. Starting Sept. 24, 2010, iShares MSCI Emerging Markets Index (EEM), a popular emerging markets exchange-traded fund, had lost 13.92%, while the S&P 500 had gained about 45.71% over the same time period. Year to date, with the S&P up 14.11%, EEM is down more than 16%. There is some debate about whether this underperformance is driven by fears of higher interest rates in the U.S. or political unrest in emerging markets, as Deutsche Bank recently argued.

The underperformance of emerging markets indices isn't just a technical investing fluke. Street protests in Turkey and Brazil and a scary spike in the Chinese overnight lending rate June 20 have rattled investors. Annual GDP growth in China, India, Brazil, just to cite three examples, is at its lowest level in more than seven years.

On Friday, U.S. interest rates were clearly in the front of investors' minds, as strong June employment data pushed 10-year treasury yields to 2.72%--their highest levels in nearly two years. Emerging markets stocks fell, with EEM losing nearly 2% even as the S&P 500 gained slightly. Consumer staples stocks, however, were flat, as measured by Vanguard Consumer Staples ETF (VDC).

There may be other factors explaining the underperformance of consumer staples stocks on Friday. Indeed, the Vanguard ETF has outperformed the S&P both year to date and since Sept. 24, 2010. Still, since consumer staples stocks are so often touted as a safe way to play emerging markets stocks, emerging markets underperformance ought to catch up with these companies' results over time.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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