Mark Hammonds, Portfolio Manager of the Guinness Emerging Markets Equity Income Fund, shares his insights on emerging markets.
When investors consider compelling investment narratives in emerging markets, they tend to focus on eye-catching parts of the economy such as high-growth technology platforms, commodity exporters riding a supercycle, or manufacturers at the frontier of a structural industrial shift.
But this is now just one aspect of what emerging markets can do for an equity portfolio. Economic development in emerging market has created the conditions for another crucial set of opportunities: high-quality, cash-generative businesses that offer a route to long-term compounding through multiple market environments.
These types of businesses, which naturally don’t feature in emerging market growth narratives, are found in Consumer Staples, Financials, and areas of Consumer Discretionary and Technology. They may seem disconnected from today’s favoured trends, but the potential for a steadier growth profile from outside developed markets is something no equity investor should ignore.
Case study: the bottling industry in LATAM
The two largest Coca-Cola bottlers in Latin America, Coca-Cola FEMSA and ARCA Continental, are clear examples of what this philosophy produces in practice. Drinks bottling may not be a headline-grabbing industry, but both companies have earned durable returns on capital over many years, and the reasons why are worth examining.
First, the brand itself creates a structural moat. The pricing power that comes from distributing one of the world’s most recognised consumer brands is real and persistent. Coca-Cola’s sponsorship of the FIFA World Cup is a direct demonstration of this. It is a brand that invests at a scale individual bottlers would struggle to replicate.
Second, both businesses operate across a geography that is meaningfully diversified. Between them, their revenue exposure stretches from the southwestern United States through Mexico, Central America and into South America.
Third, the fragmented LATAM bottling market provides opportunities for expansion. Coca-Cola FEMSA and ARCA Continental have been able to grow not only through rising consumption but also by expanding market share through the consolidation of smaller bottlers, providing two distinct tailwinds.
The result is businesses whose underlying characteristics enable them to compound value over time while avoiding the speculative-driven investing that can push share price beyond valuations.
Durable cash generation
Companies that emphasise dividend growth, paid from consistent cash flows, can provide stable returns for investors in the long run.
This is especially important in emerging markets, which are characterised by higher levels of volatility than developed markets.
This is distinct from companies that stretch for high dividend yields through financial engineering, which can lead to the risk of future dividend cuts.
Looking beyond market narratives
A ‘bottom-up’ fundamentals-focused approach shifts the focus away from forecasting macroeconomic outcomes and towards understanding the economics of individual businesses.
Much of the discussion around emerging markets analysis centres on regional growth rates, central bank rate-setting decisions, and which sector is best positioned for the next economic cycle. While these factors can influence returns in the short term, they are often difficult to predict consistently.
However, focusing on resilient businesses that have demonstrated the ability to earn returns above their cost of capital across multiple economic environments offers the potential for consistent returns over the long term.
This focus naturally leads investors towards companies such as Coca-Cola FEMSA and ARCA Continental, which exhibit pricing power, strong market positions, and disciplined capital allocation. These qualities are often more important than exposure to a fashionable theme or a rapidly growing market segment.
When investing in emerging markets, this disciplined approach produces a portfolio that is distinct from regional benchmarks. The Guinness Emerging Markets Equity Income Fund has less exposure to commodity producers, highly cyclical industries or the biggest technology names, and greater exposure to businesses operating in less crowded areas of the economy. Yet these companies can still benefit from long-term structural growth trends while offering a more consistent pattern of profitability and cash generation, which allows for an attractive income stream.
The result is a view of emerging markets that is less dependent on market narratives and more grounded in business fundamentals.
Balanced return drivers
For investors, this approach involves using emerging markets exposure to achieve something different in a portfolio: an alternative source of income, a less macro-sensitive approach, or valuable diversification in long-term compounders rather than just in high-growth trends. The result is emerging markets exposure that investors can hold through cycles – and for longer than the current themes stay in vogue.
