The Financial Times ran a good synopsis of a report released by the Boston Consulting Group on Monday. The report measures the impact of the internet on the GDP of countries in the G20, and it reminded me of a conversation I had a few months back with Richard Kang, CIO of Emerging Global Advisors.
Richard and I had talked a few times about ‘trillion’ dollar themes in emerging markets. The idea is that any investment thesis with the force of trillions behind it is going to translate into big returns over the next 5, 10, or 20 years.
One example of these themes is emerging market consumers, where the size of the market and increases in disposable income will boost companies that service the right demographics in the right regions.
The Next Trillion
The article reminded me of the conversation because the report title is “The $4.2 Trillion Opportunity.” It shows estimates of the internet economy as a percentage of 2010 and 2016 GDP. The U.K., South Korea, and China hold the top positions for current proportion of the internet economy.
What I found more important, as an investor, was the percentage point increase from 2010 to 2016. The internet is estimated to become a larger portion of the economy in these countries over the next four years. While some increases are insignificant — only 0.7% in the U.S. — other countries will see a much larger share of their economy come from the internet. The U.K., Mexico, Saudi Arabia and India will all increase by 1.5% or more.
As an emerging market investor, I want to look for existing internet names with high brand loyalty and position in these countries. Names that will benefit from the trend to higher internet usage and GDP share.
Growth Plays at Their Finest
MercadoLibre (MELI, quote) hosts online commerce and payment platforms in Latin America, primarily as an automated online commerce service – think of it as the eBay (EBAY, quote) of Latin America. The company operates in 13 countries including Brazil, Chile, Argentina and Mexico. The stock is up over 47% from a year ago and trades at a rich valuation of 56.4 times trailing earnings.
Baidu Inc. (BIDU, quote) provides internet search services in China and Japan. The shares are up almost 14.5% over the last year and trade for approximately 45.9 times trailing earnings. Chinese internet companies have come under pressure since mid-February, but growth in market penetration and mobile sales should drive good long-term revenue.
Neither company is cheap on a trailing earnings basis, nor do they offer much in the way of dividend yield. These are growth plays at their finest, including all the associated risks.
One risk is that future growth will not match expectations or prior growth. Baidu increased earnings-per-share by 97% in the last four quarters compared to the previous four quarters but will eventually see EPS growth and margins come under pressure.
Another risk is the volatility of growth within an emerging country. Baidu dropped almost 6% when the Chinese government lowered their GDP growth target from 8.0% to 7.5% earlier this month.
Despite the risks, the growth in emerging market internet commerce should drive investments like these over the next five to ten years. A prudent allocation to these and other ‘growth’ plays with trillion-dollar momentum are a good start to a long-term portfolio.