Emerging markets have been the great opportunity for FTSE 100-listed companies of the past decade, as a string of big names seektheir fortune in China, Brazil, India, Russia and other capitalist frontiers. As with any gold rush, some strike it rich, others lose their way
A Dickens of a time
Household goods giant Unilever (LSE: ULVR) and fashion house Burberry Group (LSE: BRBY) have enjoyed very different fortunes over the past year. It has been thebest of times for Unilever, with its share price up 12% over 12 months, and the worst of times for Burberry, down 30%. Thisonly continues the long-term trend, with Unilever up 70% over the past five years, while Burberry stumbled tojust 10% growth.
Like many companies selling high-end luxury goods, Burberry saunteredthroughthe financial crisis insomestyle. With a banking crisis averted, monetary stimulus actually made the worlds wealthy feel richer, while in thetime-honoured way, it made thepoorer feel poorer (but they werent buying Burberry handbags anyway). Emerging markets may have been througha radical transformation but one thing hasnt changed, they can still be volatile, and slowing growth in China and Asia has taken its toll on Burberry.
Hard times
Its year-end trading update shows continuing headwinds in Hong Kong, with comparable sales down 20% for the third successive quarter, andthe Asia malaiseeven hitting sales in Europe and the US, as Chinese tourists spend less on their travels. Domestic sales in the West have also disappointed as the real world finally hitsthe high-end fashion industry.
Now that investorshave seen how a China slowdown can hit Burberry, theyll be worrying about the state of the worlds second-biggest economy, which has just posted its lowest quarterly growth for seven years. The authorities keep blitzing the economy with stimulus but loose money seems to be losing traction. Burberrys management is warning markets of tough trading conditionsin2017 and they might just get them. Does this make now a good entry point? No. Trading at a pricey16.5 times earnings, Burberry is a fashion miss.
Please sir, I want some more
It may be the winter of despair for Burberry, but its the spring of hope for Unilever. Although to be fair, it always seems to be spring with this company. This really is a stock for all seasons, succeeding in generating the strongest growth in some of the most troubled countries, notably China, Russia and Brazil. Consumers may cut back on posh frocks and fragrances in hard times, butthey still want a clean kitchen and bathroom.
Unilever has just posted 8.3% sales growth in emerging markets, with 4.7% growth in total underlying sales. Management is working hard to boost margins by slashing costs, and reinvesting the savings into marketing and promotions, to keep the growth story rolling along. Unilever has more than lived up to itsbilling as an indomitable growth stock, and my only concernis thatnothing this good lasts forever. At 24 times earnings its also expensive, but then I always saythat. Sofar, it has been a price worth paying.
Right now, investors in Unilever aregoing direct to heaven, while those holding Burberry aregoing direct the other way. I dont see the direction of travel changing for some time.
Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Burberry. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
