Emerging markets have been the great opportunity for FTSE 100-listed companies of the past decade, as a string of big names seek their 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 the best of times for Unilever, with its share price up 12% over 12 months, and the worst of times for Burberry, down 30%. This only continues the long-term trend, with Unilever up 70% over the past five years, while Burberry stumbled to just 10% growth.
Like many companies selling high-end luxury goods, Burberry sauntered through the financial crisis in some style. With a banking crisis averted, monetary stimulus actually made the world’s wealthy feel richer, while in the time-honoured way, it made the poorer feel poorer (but they weren’t buying Burberry handbags anyway). Emerging markets may have been through a radical transformation but one thing hasn’t 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, and the Asia malaise even 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 hits the high-end fashion industry.
Now that investors have seen how a China slowdown can hit Burberry, they’ll be worrying about the state of the world’s 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. Burberry’s management is warning markets of tough trading conditions in 2017 and they might just get them. Does this make now a good entry point? No. Trading at a pricey 16.5 times earnings, Burberry is a fashion miss.
Please sir, I want some more
It may be the winter of despair for Burberry, but it’s 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, but they 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 its billing as an indomitable growth stock, and my only concern is that nothing this good lasts forever. At 24 times earnings it’s also expensive, but then I always say that. So far, it has been a price worth paying.
Right now, investors in Unilever are going direct to heaven, while those holding Burberry are going direct the other way. I don’t see the direction of travel changing for some time.