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Morningstar Publishes Research Report about Consumers in Emerging Markets

Identifies Consumer Staples Companies Poised to Benefit 

Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, has published its latest Consumer Observer research report, this time exploring the growth potential of consumer staples companies with exposure to emerging markets. In its report, “Investing in the Emerging Market Consumer — Why Companies with Moats are Poised for Outsized Returns,” Morningstar equity analysts found that companies with economic moats, or sustainable competitive advantages — more specifically, companies with brand portfolios across multiple pricing tiers and expansive distribution networks — are best positioned to monetize consumer demand in emerging markets.

Morningstar analysts identified the following consumer staples companies as poised to benefit from positive growth trends in emerging markets: Ambev, Coca-Cola, Diageo, ITC, Philip Morris International, Unilever, United Breweries, Wuliangye Yibin, and Yum Brands.

“Population growth, private investment, and urbanization are all conducive to creating wealth in emerging markets. Disposable income gradually increases over time as consumers shift from rural to urban settings and trade agricultural jobs for positions in the manufacturing, service, and technology industries. Companies with recognizable brands available at multiple price points will have the most success reaching a larger pool of customers,” R.J. Hottovy, Morningstar’s consumer equity strategist, said. “Expanding the consumer base will also require significant infrastructure upgrades in emerging markets. Regulatory and geopolitical considerations will play a large role in foreign direct investment as each country looks to strike a balance between protecting local companies and encouraging foreign investment. We think larger multinational corporations have the balance sheets and access to capital to absorb the effect of new legislation.”

In the report, Morningstar equity analysts evaluated five emerging-markets regions: China, India, Latin America, Central and Eastern Europe, and Africa. Analysts reviewed demographic trends, including population growth; driving factors of wealth creation, such as urbanization and private investment; the structure of local consumer industries; and regulatory and geopolitical concerns. Morningstar also analyzed the infrastructure needs of each emerging-markets region, as well as the strategies that consumer staples companies deploy when looking to enter or expand in a given region.

Key takeaways of the report include:

  • Favorable demographic and urbanization trends will be fundamental longer-term consumption drivers in China. Additional catalysts include the growth of China’s middle class, expanded Internet and broadband adoption, and government policy changes. 
  • India is poised to see continued population growth of approximately 1 percent annually as the working-age populace also grows as a percentage of the total population, while regulatory issues and foreign direct investment restrictions remain headwinds to the success of some global consumer staples companies.
  • The Latin American market is attractive for consumer staples companies, as population, per capita incomes, and urbanization rates are all expected to grow. Meanwhile, inflationary pressures and relatively poor infrastructure continue to present disadvantages to consumer staples companies looking to enter the market.
  • Some countries in Central and Eastern Europe are the most mature of the emerging-market regions evaluated in the report, because of the region’s transition to free markets, highly educated workforce, and relative economic stability. However, an aging population and lacking infrastructure will hamper opportunities for consumer staples companies.
  • Africa will become an increasingly strategic region for consumer staples companies over the next several years, driven by its large, young, and rapidly growing population; increasingly favorable regulatory reform; and urbanization and the resulting wealth creation among consumers in Africa. Angola, Ethiopia, Kenya, and Nigeria are key burgeoning Africa markets, in addition to South Africa.

Morningstar equity analysts cover more than 100 consumer staples companies across six continents. The latest Consumer Observer issue complements the recently published Basic Materials Observer, which examined food and agriculture industry growth in emerging markets, the factors driving shifts in what and how much countries consume, and companies with exposure to emerging-market diets. An excerpt of the Basic Materials Observer is available online.

Analysts from Morningstar’s consumer staples and basic materials equity analyst teams will discuss their research findings at the annual Morningstar Management Behind the Moat Conference, Sept. 17-18 in Chicago. The conference also includes presentations from the management teams of 45 companies, in addition to one-on-one meetings with institutional investors. All participating companies have received Narrow or Wide Morningstar® Economic Moat™ Ratings, which indicate the sustainability of a company’s competitive advantages. Institutional investors can learn more about the conference and request to attend online.

To access the August 2014 Consumer Observer, please visit the Morningstar website. The Morningstar Observer series is available to clients of Morningstar® Institutional Equity Research ServicesSM; in Morningstar DirectSM, its global investment analysis platform for institutional investors; and in Morningstar Select, the company’s institutional equity research portal.

Morningstar’s Observer series features in-depth sector research reports that harness Morningstar’s focus on a long-term investment horizon and economic moats—or sustainable competitive advantages—to analyze complex investment trends across sectors. The company publishes the Observer series regularly throughout the year, focusing on various topics across sectors, including basic materials, consumer, energy, financial services, healthcare, industrials, technology, and utilities.

Morningstar launched its equity research in 1998 and now has about 120 global equity and corporate credit analysts who provide qualitative analyst coverage of approximately 1,400 companies.