Markets

Buying Europe to Gain Emerging Market Growth at Bargain Prices

By Conrad Aenlle

Updated on: July 26, 2010 / 11:04 AM EDT / MoneyWatch

Emerging economies are growing fast, and the outperformance of their stock markets in the last year or so reflects it. Europe is stumbling along at best, with several countries along its periphery seen as verging on calamity. Their stock markets reflect that too.

What if you could get emerging market growth at European valuations? That's what John Maxwell, manager of the Ivy International Core Fund (IVVYX), tries to achieve. Maxwell told MoneyWatch that some of his favorite companies are multinationals that are headquartered in the heart of Europe but do much, sometimes most, of their business in emerging markets.

The approach seems to be paying off for him and his shareholders. His fund, which gets the top five-star rating from Morningstar, has risen 36 percent in the last five years, better than 97 percent of funds focusing on shares of large foreign companies. By sticking with European blue chips, he also has managed to steer clear of the volatility inherent in emerging stock markets.

His strategy works best for companies in consumer businesses, Maxwell said. Two of his favorite examples are the giant food producers Nestle and Unilever (UL). Nestle, based in Switzerland, derives about 35 percent of its revenues in the developing world; the figure for its Anglo-Dutch rival is 50 percent.

Both companies feature "strong distribution networks and competitive positions" in emerging economies, he explained. "Western brands are a sign of affluence and product quality." He added that Nestle and Unilever trade for much lower valuations than comparable Chinese or Brazilian businesses.

Other European suppliers of consumer staples that fit the bill include British American Tobacco (BTI) and the Dutch brewer Heineken. If you'd like a more uptown way to play the same theme, Maxwell highlighted Richemont, the Swiss company that owns the Cartier, Van Cleef & Arpels and Montblanc luxury brands, among others.

One service business that Maxwell likes in part for its exposure to Asia is the British insurance provider Prudential (PUK). About 30 percent of its business has come from the region. The proportion would have doubled or more if Prudential's acquisition of AIA, an Asian subsidiary of American International Group (AIG), had one through. The deal collapsed recently after Prudential was unable to reduce the purchase price.

Maxwell cautioned that direct investments in emerging markets offer better value in certain sectors. He prefers Latin American telecommunications stocks to Telefonica de Espana (TEF), the Spanish phone company through which investors often seek entry into the region.

But Europe can be a better place to bargain-hunt for manufacturers of big-ticket items like cars, he said, citing Volkswagen. The same goes for companies that make really big-ticket items, such as the Swiss-Swedish engineering concern ABB Group (ABB).

It's no coincidence that many of Maxwell's selections are based in places like Switzerland and the Netherlands. Doing business in emerging economies is particularly appealing for them and their investors because they can participate in growth in the developing world and they get to escape their small, stagnant domestic economies too.

"If you've developed a successful business and penetrated a small market," he pointed out, "you need to go overseas for growth."