How I'll buy into emerging markets

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GlaxoSmithKlineAs a global investor and student of the markets, I think UK share investors have things pretty good. Based on the returns from the FTSE All Share Index since 2008, or even the last few months, you might think I'm mad for saying that, but allow me to explain.

The volatility in the market the last few years has certainly been a challenge, but the UK has well-regulated markets and high corporate governance standards. The Corporate Governance Code and its regular revisions are particularly noteworthy and a practice I would like to see adopted by a certain large economy on the other side of the Atlantic -- but that's a topic for another day.


Where's the growth?

With inflation running hot and unemployment at a 17-year high, the economy is the undeniable challenge facing investors. Fortunately, it's quite easy to gain exposure to faster-growing economies in the emerging world while still investing at home and benefiting from the robust regulatory and governance systems in place.

Emerging markets aren't a panacea, of course, and the economies in Latin America, Asia, Africa and Eastern Europe experience recessions, too. But these smaller economies generally have a number of qualities that should make their dips shallower and recoveries more vibrant, which is precisely what we saw as the world came out of the global financial crisis in 2009.

Emerging market tailwinds

Lower debt levels and generally smaller deficits are the emerging markets' biggest advantage. And since they're not burdened by painful austerity plans, more funds can be channelled into investment and social improvements. This alone is an important advantage for these economies, but since these many have also suffered from years of underinvestment, there are big economic gains to be had from spending on infrastructure and education.


Then there is the all-important demographic dividend. In simple terms this means that the average age in these countries is younger, so the need to help support pensioners is low. This allows more of what's earned to be directed toward additional investment and consumption, which can boost growth further.

To get the most benefit from these economic advantages, governments in emerging countries need to put policies in place that promote growth, development and job opportunities for young workers. If they fail, their young populations can quickly become powder kegs with dire consequences. Fortunately, emerging markets have done better on this front in the last decade. The Economist recently noted how Africa is showing steady improvement on this front despite its checkered past.

Two big names

As the Co-manager for The Motley Fool's Champion Shares Pro and a team member working on the development of The Motley Fool's latest investment service, I'm constantly scouring the LSE for attractively priced companies that can benefit from emerging market growth.

Two larger and less volatile shares I think are well positioned in emerging markets are GlaxoSmithKline and Unilever. Both have a big focus on emerging market growth, but Unilever is the clear leader with more than half of revenues coming from these markets already. While behind on this measure, Glaxo is no slouch. Its (Euronext: ALITS.NX - news) partnerships with South Korea's Dong-A, India's Dr. Reddy's Laboratories and other emerging market drug producers have it well positioned for long-term growth in these markets. I also like that the CEOs at Unilever and Glaxo have improved the quality of the businesses and that the shares of each still offer dividend yields of at least 3.5%.

Going small

Glaxo and Unilever look like they're heading in the right direction and I expect they'll post consistent improvements. But the lower revenues bases at small companies give them an even better opportunity to benefit from emerging market growth. One I like and have been considering for some time is collagen maker Devro (LSE: DVO.L - news) . The collagen Devro produces is used to make sausage casings and for other food and medical uses, but it's sausages that are the main focus. Traditionally, sausage casings are made from sheep gut, but as incomes in Asia and Latin America have grown, demand for higher protein foods like sausage have increased, too. Sheep production simply hasn't kept pace with the demand for gut, making its cost prohibitive. With emerging market incomes still well below those in the developed world, I expect this will remain a growth opportunity at Devro for years to come.

A better known and less volatile idea is PZ Cussons (LSE: PZC.L - news) . The thesis is similar to Unilever's, but PZ Cussons is more focused on just a few countries. It has a big business at home, too, of course, but its growth is largely driven by its market-leading positions in baby care products in Indonesia and personal care offerings in Nigeria. Neither country is as well known for its economic growth as the BRIC (Chicago Options: ^RBRCUSD - news) nations, but they're a big reason why PZ Cussons has grown earnings so consistently the last three years.

Getting global exposure

The emerging world will have its ups and downs, but I'm confident that the economic growth in these countries will have greatly outpaced what we'll experience in the UK, Europe (Chicago Options: ^REURUSD - news) and US. Finding the companies that are already benefiting from the growth in these economies is one of the best ways I know to bolster our portfolios and offset what looks like many more years of slow growth at home.

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