Corporate America, the Fed, and Emerging Markets

Last week I went a little off-piste, talking more about the problems of start-ups and the failure of Investment Consultants rather than Emerging Markets.  

I am back on track this week.

One of the points I tried to make in my introductory blog was that the Fed could not afford to “ Taper and be damned” when it can to the Emerging Markets, because the linkages between GEMs and Developed Market Companies were now too strong.

The risks of collateral damage from too aggressive tightening was brought home this week when Unilever posted a warning that sales growth would be below analyst’s forecasts of 4.5 - 5%, and nearer 3 - 3.5%. This comes after the company paid $3.2 BN in the summer to raise its stake in its Indian subsidiary, Hindustan Lever, from 52% to 67%. The acquisition shows how investment in Emerging Markets has been key to the company’s recent strategy. (Unilever is currently sticking with full year targets, although most analysts appear to have trimmed full year estimates) 

As the FT video makes clear, GEMs now make up over 57% of sales for Unilever

Many other consumer companies, such as SABMiller, Nestlé, and Diageo also got caught in the downdraught, as analysts fretted about their Emerging Markets exposure. These companies are major blue chips in every sense.

Although not Taper related, Colgate provides us with a good work through of the problem. It was forced to take a 1^st Quarter charge of $120M on the back of Venezuela’s devaluation in April; Venezuelan sales make up about 5% of total sales for Colgate.

It is interesting to look at where Colgate’s growth was coming from during that quarter – per the WSJ

“Colgate's sales growth came primarily from higher sales volume. Prices were 1.5% higher, on average, compared with last year. Organic sales rose in each geographic region, with North America up 5.5%, Latin America up 9%, Europe and the South Pacific up 0.5% and Greater Asia and Africa up 10%.”

Page 81 of Colgate’s 2012 10 – K shows us 2012 sales breakdown by region.

Reworked as a pie chart you get the following distribution.

All these companies are solid Blue Chips; they employ hundreds of thousand of Americans, and you will find their shares at the core of any “safe” American retirement portfolio. Many of them hold significant cash balances overseas that the Government would very much like to see repatriated. I could have trawled most of the S&P 500 and got reasonably consistent results – from GE’s 10-K “Our growth is subject to global economic and political risks.

We operate in virtually every part of the world and serve customers in more than 100 countries. In 2012, approximately 52% of our revenue was attributable to

activities outside the United States. Our operations are subject to the effects of global competition and geopolitical risks.”

In short, the Fed could not afford to taper aggressively not because of the damage it would do to the Emerging Markets, but because of the damage the Emerging Markets would do to the US.

It’s a whole new world out there.