SEMI-ANNUAL COMMENTARY
Go Local: Why Smaller Companies May Offer the Best Exposure to the Emerging Market Consumer
 
 

SEMI-ANNUAL COMMENTARY

Go Local: Why Smaller Companies May Offer the Best Exposure to the Emerging Market Consumer

 

March 2017

 

Investors in emerging markets have been whipsawed in recent months as headlines were dominated by fears about global trade growth under a Trump presidency, and then the rally in commodity prices. Out from the glare of the headlines our investment philosophy is focused on finding high quality businesses exposed to sustainable pockets of growth in the emerging markets. We look for growth trends which we believe can persist over time, such as rising consumer spending in Asia.

We look to invest in companies with resilient business models that are exposed to secular growth trends and backed by strong execution. Within the emerging markets universe, we often find companies that are lesser known, yet leaders in their markets. Our work led us to two mid-sized companies with exposure to the developing Asian consumer: Korean home improvement company Hanssem (3.51% of the Portfolio as of January 31, 2017) and market expansion services provider DKSH (4.56% of the Portfolio as of January 31, 2017).

Home improvement spending unlocked as apartments age
Consumers start spending on home improvement when the market displays a combination of higher household income and an aging housing stock. When families have lived in their homes for a number of years or they move into older homes, spending on home improvement goods and services increases. We believe the fundamentals of the market in Korea are supportive of this trend, which is still in its early stages. 

Korea Apartments Age Profile
 
 
 
 

One of the best ways we have found to get exposure to this sustainable growth trend is through Korean home improvement company Hanssem. Hanssem is a mid-sized company that has developed a strong and growing brand and is a market leader in both its two business lines: interior furniture and home remodeling. We believe Hanssem is set to capture this changing market place as consumers start to upgrade from non-branded to branded home goods. This is an underappreciated, sustainable growth opportunity driven by structural demand growth which we believe Hanssem is perfectly placed to benefit from. 

Local market knowledge is the key to attracting new customers
Rising middle class incomes driving new consumption across many emerging markets, particularly in Asia, is well known. Playing an important role to expand the consumer markets across the Asian landscape are Market Expansion Service (MES) providers. MES providers enable both multi-national corporations and regional brands to expand their products to new geographies and grow their business in existing markets.

We own market expansion service provider DKSH in the portfolio. DKSH has a dominant presence in the healthcare and consumer goods industries across key markets of Thailand, Malaysia, Greater China, Myanmar, Singapore and Vietnam. As inter-Asia trade continues to grow, the value proposition for a company like DKSH to position brands in many markets at once while able to tailor its services to the individual needs of the companies it serves will only keep increasing. DKSH is well-positioned to benefit from these trends driving the MES industry.

Finding Leaders in the Emerging Markets
Despite the ongoing market volatility, there are still opportunities to be found in the emerging markets, often in these mid-sized local companies that are under-researched and less well known. Our combination of identifying long-term industry themes, along with disciplined stock selection, helps us find them. Our portfolio is steadfastly focused on seeking sustainable long-term growth, and our stock picking discipline revolves around finding companies with visible steady growth and respect for return on capital employed. In our view, Hanssem and DKSH exemplify this standard and are leaders in their industries. They are joined by other leading emerging market companies in our portfolio, from Asia to Latin America, and we are on the lookout for others every day.

 
Managing Director
 
 
Executive Director
 
 

The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

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CRC 1737251  Exp. 03/17/2018

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