Emerging, but no longer a mother lode
When it comes to investing in emerging markets, few companies have been as gung-ho as Diageo, the British maker of the Guinness, Johnnie Walker and Smirnoff brands. But now that troubles are cropping up in many such countries around the world, Diageo has turned from cheerleader to excuse-monger.
Government crackdowns on high-end drinking in China. Inflation and currency worries in Argentina and Venezuela. Political turmoil in Thailand; saturated beer markets in Nigeria; a religious backlash in Turkey - these and other adversities were cited by company officials this year when Diageo announced disappointing profits.
And like Diageo, a number of other multinational corporations have recently blamed turmoil in emerging markets for dents in their bottom lines.
From consumer-oriented outfits like Procter & Gamble, Yum Brands and Coca-Cola to technology leaders like IBM and Cisco, companies that crowed for more than a decade about their exposure to these booming economies are now eating more than a little crow.
They have cut growth forecasts as debt levels rise and political complications take center stage in numerous developing nations, with attention recently swinging to the risk of war between Russia and Ukraine.
The latest casualty has been Danone, the French yogurt giant, which generated more than 60 per cent of its 21 billion euros ($28.9 billion) in sales last year from emerging markets. Russia is its top market in the developing world.
So it was not entirely surprising that Danone reported its first profit drop in a decade last month, and that its stock took a sharp hit on Monday, when tensions were running high between Moscow and Kiev.
None of the big globe-spanning companies are giving up on the developing world, of course, since prospects generally remain stronger there than in the advanced, industrial nations.
But even a stellar performer like IBM - which recently announced that it was working to reach 30 per cent of sales from growth economies by 2015, compared with about 22 per cent when it set the target - disclosed this year that its sales to China were down 23 per cent.
Yum Brands, the company behind KFC and Pizza Hut, said in January that its earnings per share for 2013 were down 9 per cent compared with the previous year. China, where the company gets 50 per cent of its revenue, was responsible for much of the retreat, partly because of a government investigation of one of Yum's chicken suppliers.
"There is a level of expectation that has been disappointed," said Tobias Levkovich, an equity strategist at Citigroup who recently published a report on which companies in the Standard & Poor's 500-stock index had the most exposure to emerging markets.
Levkovich counts 51 companies that depend on the developing world for at least 20 per cent of their sales. Since worries began about emerging countries' prospects last summer, he noted, his emerging-markets index has trailed the market on the upswing, while also performing worse when stocks are heading lower.
From now on, he said, "investors will look at this stuff much more closely."
There are exceptions. Companies like Caterpillar, which sells heavy machinery, and Volkswagen, which sells cars, continue to perform well in China and other fast-growing economies.
Among the excuses that companies have put forward, it is noteworthy that some of the more profound setbacks cited are those that reflect more of a cultural disconnect than economic maladies.
For example, Diageo's large exposure to Turkey derives mostly from its $2.1 billion purchase in 2011 of Mey Icki, the dominant producer of raki, the country's anise-flavored national drink. Since then, Turkey's Islamist government has put in place a series of anti-drinking measures, including a ban on retail outlets selling liquor from 10 p.m. to 6 a.m.
Net sales of Diageo products in Turkey were down 10 percent in the last half of 2013 compared with the same period the previous year.
Similarly, in China the company reported a sharp drop-off in sales as the result of a government anti-extravagance campaign that led to state officials cutting back on alcohol-fueled entertainment.
A spokeswoman for Diageo, Kirsty King, said the company remained committed to emerging markets and cited recent remarks by Ivan Menezes, the company's chief executive.
"We always knew emerging markets would be volatile, and we are facing some cyclical challenges," Menezes said at the release of the company's most recent results. "It's not uniform. We achieved growth in many emerging markets, like South Africa, Brazil, India and Russia."
Other companies have also been hit by unexpected blows unrelated to economic ups and downs.
Analysts note that links between Cisco, IBM and the National Security Agency, in the aftermath of the eavesdropping controversy, led to a backlash by the Chinese government that, along with enhanced competition from local suppliers, contributed to the two companies' poor performance in China.
The "cultural differences" between what these companies want to sell and how demand for these products evolves over time tend to get short shrift, Levkovich said.
Investors are becoming increasingly wary of these companies' ability to successfully navigate the thicket of issues that can arise in such politically and culturally volatile settings.
IBM's stock price, once a highflier, has barely budged in the last two years, drastically trailing the 43 percent surge in the S&P 500. Yum, with its even more ambitious bet on emerging markets, has fared about the same in terms of its stock price.
Diageo, by comparison, has done better. Its stock increased more than 30 percent in 2012. But since the beginning of 2013, when problems in emerging markets began to develop, its share price has remained more or less flat as the broader index has soared.
So even as companies vow to remain committed to the growth opportunities they see around the world, it is clear that investing in big emerging markets - be it long term or short - is no longer viewed as a simple one-way bet.
"There was a really big hype," said Dani Rodrik, an expert on the globalization of finance at Princeton. "But a lot of these countries were riding high on borrowed money and high commodity prices, and hidden inside this bubble you had corruption and governance failures."
© 2013, The New York Times News Service
