The art of Kevin Blythe Sampson

THE ART OF
KEVIN BLYTHE SAMPSON

11/8/11

Wal-Mart's Emerging Market Investment

Why You Should Do What Wal-Mart Just Did

by Alexander Green, Chief Investment Strategist
Monday, October 4, 2010: Issue #1358

Last week, Wal-Mart (NYSE: WMT) made a $4.6 billion offer for Massmart Holdings, a major South African retailer with operations in 12 other African nations, too.

What’s the attraction?

Massmart operates low-cost, high-volume stores in general retailing, making it a good fit. The buyout will serve as an entry point to the entire continent.

Yet there are risks aplenty. South Africa is only beginning to emerge from recession. It’s plagued by high crime and unemployment and has a heavily unionized work force known for long, sometimes violent, strikes.

So why is Wal-Mart doing this? Because it can’t afford not to…

Why Wal-Mart is Heading to South Africa

Over the past decade, Wal-Mart shares have flatlined, just like the broad market. Yet shares of its major rival, Target (NYSE: TGT) have more than doubled.

Wal-Mart has also lost ground to its global archrival Carrefour. The French-based chain got to South America and Asia ahead of Wal-Mart. Carrefour is even the largest international retailer in China, the most coveted retail market in the world.

Wal-Mart must move aggressively to maintain growth in a difficult global marketplace. And so must investors who want to achieve financial independence in the years ahead.

Five Reasons Why You Need to Invest in Emerging Markets

Why should you diversify into emerging markets? The reasons are five-fold…

  1. Demographics: Emerging markets contain three-quarters of the world’s land mass and roughly the same percentage of its people. China and India alone make up nearly a third of the world’s population.
  2. Stronger Growth Rates: If you were a businessman, where would you rather operate – in an economy growing at 2% a year or in one growing four times that fast? It’s not a difficult question to answer.
  3. Better Valuations: In the United States, you might pay 30 times earnings for a company growing at a 20% annual rate. In Brazil or Indonesia, you’re more likely to pay about 15 times earnings. If you believe in buying growth at a reasonable price, you need to own companies in developing markets.
  4. Currency Diversification: The old greenback isn’t what it used to be. And there’s a risk that it may get weaker in the years ahead. Some emerging markets, on the other hand, hold their currencies artificially low to promote exports. That means investors are likely to see currency appreciation as well as capital appreciation.
  5. Safety: This is a shocker to many investors: Investing in inherently riskier emerging markets makes your portfolio less volatile. Why? Because emerging markets aren’t perfectly correlated with developed markets. When our markets zig, theirs often zag. The final effect is that your portfolio shows higher returns with less overall risk, the whole point of diversification.

Why U.S. Growth Will Come From Abroad… And Where You Need to Be

A few days ago, a friend with a local business told me he can’t imagine where – with the domestic economy in a funk and the home refinancing game over – future U.S. economic growth is going to come from.

It will come from companies who are moving aggressively overseas – like Wal-Mart, which has boosted its international sales to nearly one-quarter of the company’s total, compared with just 4% in 1995. It will also come from American companies that are able to service these firms.

Consumers in emerging markets need everything we take for granted in the West: better quality food, clothing, shelter, health care, credit cards, computers, cell phones, insurance and so on.

But make no mistake: Countries like Brazil and India and China are not going to let Western firms come in and just pick all the low-hanging fruit. If you want to reap the maximum benefit from the world’s biggest economic development story, you need to move a percentage of your portfolio into these markets themselves.

That’s the real lesson behind the Bentonville Behemoth’s aggressive South African new acquisition.

Good investing,

Alexander Green

Wal-Mart's Emerging Market Investment