Better Exposure to Emerging Markets Through Affiliates: Study

The best way to get exposure to emerging markets may be to invest in the affiliates of multinational corporations that are listed on local exchanges, a new study suggests.

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The research, conducted by Yale University, found that publicly-traded emerging market affiliates of large multinationals (headquartered and mostly listed in developed markets) have outperformed their parent companies, the local stock market and the wider emerging markets over the last 14 years.

Notably, these affiliates managed to deliver strong performance with low volatility.

Usually, the higher performance of emerging equity markets is associated with considerably higher volatility.

The study, which was commissioned by Aberdeen Asset Management, identified 92 such affiliates across the emerging world — 24 in Asia, 15 in Eastern Europe, 22 in the Middle East, 9 in Africa and 22 in Latin America.

Their parent companies come from various developed markets and some have multiple affiliates.

Examples include: Nestle, which has affiliates in India and Malaysia; Unilever with affiliates in India, Pakistan and Indonesia; Goodyear Tire & Rubber with affiliates in Thailand and Turkey; and Wal-Mart with affiliates in South Africa and Mexico.

According to the study, one dollar invested in the group of affiliates in June 1998 would have grown to $23.03 by June 2011.

The same investment in the local markets would have grown to $8.92. Parent companies would only have returned $4.15 over the same period of time.

Over the last 14 years, affiliates in Latin America, EMEA and Asia outperformed their local indices by 41 percent, 134 percent and 50 percent, respectively.

Moreover, affiliates performed remarkably well during the financial crisis, compared to both their local markets and the developed markets. Companies in Asia did especially well, combining high performance with markedly low volatility.

Affiliate Performance

Latin America
Av. Annualized Return 29.8% 26.2% 23.5%
Annualized Volatility 35.8% 17.0% 29.5%
Source: Yale School of Management

The study suggests two main reasons for the outperformance of affiliates: improved corporate governance through the controlling stakes of their parents and a stabilizing role of the parent companies.

“Both seem critical specifically in financial crises. These may give these affiliates a clear comparative advantage over their local competitors that should endure in the foreseeable future,” says Martjin Cremers, Associate Professor of Finance at Yale School of Management.

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