Buy US Shares to Make Money in Emerging Markets, Mercer Says

(Bloomberg) — Mercer LLC, the investment consultant that counts giant sovereign wealth funds, insurers and pension managers as clients, says smaller investors seeking exposure to emerging markets are best off doing so by buying shares in US companies.

The New York-based firm, whose clients manage some $16 trillion in assets, says that while the most interesting investment opportunities in emerging markets for bigger funds are in areas such as private equity and frontier-market infrastructure, retail investors are better off tracking global indexes led by the US.

The recommendation comes as emerging stocks trail their US counterparts for a seventh straight year. The benchmark MSCI index for developing nations has lost almost 2% so far in 2024 compared with a more than 4% gain for the S&P 500.

“If you’re trying to get exposure to the underlying GDP growth, the favorable demographics, and all the long-term favorable things in emerging markets, you get a lot of that by investing in global multinationals,” said Rich Nuzum, executive director and chief investment strategist. “Pick a multinational: Apple, Nvidia, Coca Cola, or any of the pharmaceutical companies, they’re selling and producing in emerging markets, although they may be headquartered in the US.”

EM Equities Lag Behind | Emerging markets are underperforming US equities for 7th year in a row

Mercer’s recommendation echoes the strategy of Lewis Kaufman, whose controversial Artisan Developing World Fund is technically the world’s best-performing emerging-market stock fund, generating double-digit annual returns. “Technically” because Kaufman’s EM fund has invested more than 40% of the $3 billion it manages in US stocks.

Read: Nvidia Catapults EM Stock Picker to Top Ranking and Irks Rivals

That’s the correct strategy for retail investors, Mercer says, without mentioning Kaufman or his fund, advising them to take advantage of future emerging-market growth through a passive all-companies world index-tracker that includes US heavyweights.

More than 60% of Apple’s revenue is international, with 18.9% coming from China alone, according to data compiled by Bloomberg. Figures for Coca-Cola are similar, while Nvidia gets 56% of its income from outside the US.

‘Hard to Beat’

“That portfolio has been really hard to beat over time for active managers,” Nuzum said. “Particularly if you’re US-domiciled or in any of the countries where it’s hard for an investor with a few hundred thousand dollars to access private markets.”

This strategy has its limits though, and shouldn’t be adopted by larger, strategic funds looking to build exposure in the developing world, he said.

“If you want exposure to the entrepreneurial spirit in Vietnam, you need to do Vietnamese private equity venture capital. If you want exposure to the possible property recovery going forward in China, you need to invest in opportunistic real estate in China,” he said. “You can’t get that by investing in US venture capital or US real estate.”

Sophisticated investors favor those spaces because if they’re early and turn out to be right, others will see the historical data and get more comfortable with following them.

For those investors, “the private market investment opportunities in emerging and frontier markets could be the next big thing,” Nuzum said, especially as global multinationals seek to diversify supply chains away from China. “We’re very bullish on private market investment in the emerging and frontier markets, partly because that’s so underrepresented in most client portfolios against the potential opportunity out there.”

Bullish on China 

On China, Nuzum said some investors have gone to zero exposure, either because of a tactical view on the country’s outlook or concerns about geopolitical risk or environmental, social and governance guidelines. Others, particularly Middle Eastern investors, are overweighting China against the benchmark index because of lower valuations, he said.

“For every dollar that you put into China, you’re getting twice the earnings yield in the US,” Nuzum said, referring to current price-to-earnings ratios.  “We’re long-term bullish on China. There’s huge room for China to continue to leapfrog technology, apply capital to labor and improve productivity.”

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