On the Rise of Big Emerging Market Companies, Why Buy Them and the Blue Zones of Longevity – Part V!

From: aditya rana
Date: Sat, Oct 12, 2013 at 2:23 PM
Subject: On the Rise of Big Emerging Market Companies, Why Buy Them and the Blue Zones of Longevity – Part V!

Hi!,

The global business landscape is currently dominated by the large multinational companies largely based in the developed world. However, current trends point towards a rapidly changing business environment, where large companies from emerging markets are increasingly likely to play a more dominant role in shaping global business. A recent report from the Mckinsey Global Institute (http://www.mckinsey.com/Insights/Urbanization/) paints a fascinating picture of this important trend. To summarise some key parts:

-While the rise of emerging markets have provided multinational companies with remarkable market opportunities and access to an increasingly skilled labour force, it has also fuelled the emergence of large local companies which have the potential to redraw the global business map and change the rules on global corporate competition.

-Currently, there are 8,000 large companies worldwide with revenues of more than $1 billion, and three out of four of these are based in the developed world. By 2025, there will be 7,000 new additions and seven out of ten of these will be based in emerging markets.

-These 8,000 companies have combined revenues of $57 trillion, which is 90% of global GDP (not an exact like-for-like comparison as GDP is based on net value added), with 53% being publicly traded, 37% privately-owned and 10% state owned.

-The western developed world is home to 11% of the world’s population but accounts for 50% of these large companies headquarters and 60% of their global revenues. By comparison, South Asia is home to 23% of the world’s population but only 2% of the large companies.

-By 2025, these 15,000 large companies are likely to have $130 trillion of revenues, 46% of which will be generated by large companies based in emerging markets (up from 27% today). Additionally, 45% of the Fortune Global 500 are likely to be based in emerging markets, up from 5% in 1990 and 17% in 2010, and 120 of the list will be based in the China region.

-The growth of large companies in emerging markets reflects the growth of GDP in emerging economies which is being fuelled by rapid urbanization, income growth and exchange-rate appreciation.

-As highlighted in previous research, about one billion people in the cities of the emerging world are likely to enter the global "consuming class" by 2025 and have sufficient incomes to become significant consumers of goods and services. Many products are hitting take-off points at which their consumption rises rapidly.

-Emerging markets are also becoming a source of higher-skill talent – India and China are likely to provide more than half of the increase in the global supply of workers with some college education, and two-thirds of the increase in science and engineering graduates by 2030.

-Against this economic backdrop, local companies are expanding, maturing and reconfiguring through mergers and acquisitions which will shift more of the world’s decision making, capital and innovation to emerging economies.

-Two forces are providing the impetus for the growth of large companies in emerging markets – 1) emerging economies have a significantly smaller base of large companies relative to their GDP providing room for catch-up growth, and, 2) cities in emerging economies are experiencing faster economic growth than cities in advanced nations, creating new synergistic business opportunities.

-Mass urbanization is moving people to densely populated urban areas, where large companies can benefit from economies of scale – as services like water, housing and education can be delivered at a significantly lower cost in densely populated cities than in sparsely populated rural areas.

-Rising incomes in the cities, are rapidly fuelling demand for retail, professional and personal services and the growth of large service companies. For example, the urban per capita income in Brazil and Mexico is 30% higher than that in China, resulting in about 40% of the large companies in the two countries being in the service sector compared to only 27% in China.

-Companies in emerging economies serve home markets that are more diverse than the world’s mature markets and have learned to compete for customers at different income levels. By adapting to constraints in physical and social infrastructure, and to differing regulatory environments, many have developed a culture of ingenuity which makes them formidable competitors.

-The story has a precedent in the 1970s and 1908s, when rise of innovative and quality focussed Japanese companies caught the US and European companies unawares. More recently, Korean companies have taken leadership positions in highly-value-added industries and have developed distinct cultures and operating methods – many are family controlled, allowing them to take a longer-term view and make larger capital investments to build market share rather than focus on quarterly profits. In addition, they have a higher focus on R&D, supported by access to a hardworking and well-educated workforce.

-Companies based in emerging markets will also grow by expanding overseas, a trend which has already started. Emerging countries are increasingly becoming sources of FDI, rising from 5% of outward FDI in 2001 to 21% by 2011. China’s FDI has increased by almost 50% between 2004 and 2010, reaching $70 billion, two-thirds of which was directed at other Asian countries. These companies are also expanding overseas through acquisitions and organic growth.

-The increase of large companies based in emerging markets will be spread out over more cities, while large companies in the developed world will continue to be concentrated in a handful of cities. Roughly 280 cities in the emerging world are likely to host large companies by 2025, an increase of 70% from the current level. About 150 of these cities will be based in China, while Western Europe will add only three such cities.

-The growth of large companies in emerging markets will not be limited just to private-sector – given the huge scale of urbanization, many cities will reach sufficient scale for local or regional utilities, healthcare services and logistical centres to cross the $1 billion threshold.

-The next 10 to 15 years are likely to bring about a seismic shift that challenges the long time dominance of western companies. While the rise of these corporate giants will surely increase the competition for companies and cities alike, it will provide dynamism and new ideas that will drive future productivity, dynamism and job creation. These factors will shape not just where, but how global businesses operate for decades to come.

Fascinating insights, and reinforces the case for investing in emerging markets with a particular focus on home-grown companies than just foreign subsidiaries of global multinationals. As earlier research from GMO has pointed out (see graph below) , local companies in emerging markets have outperformed multinationals over the last five years but still trade at a significant valuation discount – their outperformance has come from earnings growth rather than valuation expansion.

As the latest 7-year asset class expected return forecasts from GMO illustrate – EM equities are currently the most attractive class with a real expected return of 6.5% per annum. Stay long emerging markets, and use the volatility and market panics to add to your positions!

The Blue Zones of Longevity-Part V:

This is the fifth part of the summary of the recent book: "Blue Zones: Lessons for Living Longer From the People Who’ve Lived the Longest" written by Dan Buettner, an internationally recognized explorer and educator. The Blue Zones are five specific towns or regions around the world, where people are up to three times more likely to live to be at least 100 years old, while remaining active, with a significantly lower rate of disease. The Blue Zones include the Barbagia region of Sardinia in Italy, Okinawa in Japan, the community of Loma Linda in California, the Nicoya Peninsula in Costa Rica, and the Greek island of Ikaria.

-The craggy and windy island of Ikaria lies about 30 miles off the western coast of Turkey. The island has long been famous for its wine, and according to Homer’s legend, Odysseus got a one-eyed Cyclops drunk on Ikaria’s "Pramnian wine" which has been produced there since the 6th century BC. The village of Kambos claims to be the birthplace of viticulture.

-For most of the ensuing 2,000 years, life was tough for the Ikarians. A 17th century visitor described the Ikarians as "proud, shoeless, goatskin wearing people who slept on the ground", and added "the most commendable thing on this island is their air and water, both so healthful that the people are very long lived, it being an extraordinary thing to see persons hit 100 years of age".

-In 2008, a demographer discovered that a cluster of villages in the inner mountainous region of the island had a striking proportion of people who were 85 years or older. Subsequently, the author and a team of demographers led two National Geographic expeditions to investigate the island’s extraordinary longevity. They had more than 3 times as many healthy people over 90 than the rest of Greece, and (like Sardinia) as many healthy males as females over 90 (in other developed countries females over 90 outnumber men four to one).

-Not only Ikarians were living longer, they were living 5 or 10 years longer before succumbing to chronic diseases like cancer. They suffered half the rate of heart disease, a third the rate of depression and less than half the rate of dementia when compared to the rest of Greece.

-Ikarians living in the highlands exercised mindlessly, by gardening or walking to their neighbour’s house. A study suggested that about 80% of Ikarian men between the ages of 85 and 100 were still having sex, a quarter of those doing so regularly!

-The Ikarian’s eat a version of the Mediterranean diet – rich in olive oil and vegetables, low in dairy and meat (on festivals and holidays when the family pig maybe slaughtered), with some alcohol daily. It included an abundance of potatoes, goat milk, lots of beans (lentils, garbanzos) and some fruit. They eat fish sparingly, perhaps because the journey from the sea to the mountains took a whole day.

-Ikarians seasonally gather more than 150 different varieties of greens that grow wild for salads or to bake into pies – some of these greens contain ten times more antioxidants than red wine. They drink a "mountain tea" daily made from seasonal herbs or greens (wild marjoram, sage, mint, olive leaf, rosemary and dandelion) they rotate the flavours and research has shown that these teas have blood pressure lowering properties, reduce the risk of blood clotting, have antiviral properties and are mild diuretics (they help the body flush out waste products and help lower blood pressure).

– Ikarians also take honey as a medicine for a variety of uses- to treat wounds or cure the flu , and have types of honey which are not seen anywhere else in the world. Old people start their day with a spoonful of honey.

-Ikarians nap regularly (30 minutes), and a study (Harvard and Athens) has shown that occasional napping reduced the risk for coronary heart disease by 12%, while regular napping reduced it by 37%. Ikarians also fast regularly (for religious reasons) and have strong social and family networks.

To be concluded in the next newsletter.

I will be travelling over the next two weekends so the next newsletter will be sent out on November 2.

Regards,

Aditya

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