Think Multinationals Give You Emerging Markets Exposure? Think Again

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Robert Holderith

NEW YORK ( TheStreet) -- With the ongoing volatility of U.S. markets, mounting European sovereign debt concerns, and lagging developed market growth, investors are gaining an appreciation for the projected growth of emerging markets.

In the U.S., a popular method of gaining exposure to these markets is to buy blue-chip multinational companies that are based in developed countries, especially those with a consumer focus.

The investment theory suggests that buying emerging markets (EM) exposure through developed country multinationals, preferably U.S.-based companies, allows investors to participate in EM growth while reducing their exposures to currency and political risks.

Developed market (DM) multinationals are helping fuel this perception by touting their EM activities, often featuring them in their annual reports while glossing over their home market stagnation. Indeed, readers of YUM Brands' latest annual report might wrongly conclude that many Chinese live on a diet of Kentucky Fried Chicken.

While there are many compelling reasons to invest in multinationals, emerging markets exposure isn't one of them. The mega-cap, multinational weighted S&P 500 index constituents realize only about 12% of their revenue from EM countries.

The few multinationals that derive more than half of their revenue from emerging markets, such as Mead Johnson ( MJN) and Avon ( AVP), are limping in their home markets, countering the upside EM exposure investors are seeking.

Very few U.S. multinational consumer-products companies have seen cumulative revenue growth, including their EM business, of more than 10% in the past three years. Some companies, such as Johnson & Johnson ( JNJ), have seen overall revenue decline in the same period.

Here is a sample of multinationals frequently recommended for obtaining emerging markets exposure:

Yum! Brands ( YUM): Yum! Brands derives a little more than a third of its $11.3 billion revenue in China. Its best revenue-producing brand in the U.S., Taco Bell, has no locations in the country. Meanwhile, YUM's U.S. division has achieved only about a 2% revenue-growth rate over the past five years;

Procter & Gamble ( PG): Thirty-four percent of P&G's 2010 revenue came from EM countries, while the company's global revenue has slipped 11.5% since 2008;

Coca-Cola ( KO): KO, widely recognized as a multinational that has achieved considerable success in EMs, derives only a third of its global revenue from these markets;

Colgate-Palmolive ( CL): CL also has achieved considerable success in emerging-market countries and derives 45% of its revenue from these markets. But its cumulative revenue growth these past years is up only 1.5%.

McKinsey published a study (see chart above) earlier this year that found "companies from emerging markets are outgrowing competitors from developed ones at a startling pace."

The report said that "revenues are increasing much more quickly for companies that have their headquarters in emerging economies than for their counterparts from developed economies overall, at home, in advanced economies, and in other emerging markets."

The report noted that the "difference in growth rates is most startling in emerging economies where both categories of companies are on their home turf -- 30.7% growth for business units of those based in emerging markets, compared with 12.6% for their counterparts from the developed world." There are many successful DM multinationals; few of them offer a strong case as alternatives for investing in EMs.

Robert Holderith is president and founder of Emerging Global Advisors, a New York-based asset-management firm. He previously held several executive positions at ProFund Advisors. Earlier, he worked at UBS, where he helped develop the firm's first ETF models. Holderith has been using ETF products, modeling ETF portfolios and has developed ETF-based business models for more than a decade.

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