Three UK shares with exposure to emerging markets
Emerging markets come with attractive growth prospects. But for those who like to buy individual shares, they can sometimes be hard to tap into.
Here I look at three UK-listed companies that could benefit from economic growth in Eastern Europe, and across Asia. We see some great long-term potential in these markets, but please remember they’re higher-risk.
When you think of emerging markets you’d normally picture far-flung exotic shores. But lots are actually just a low-cost flight away.
Wizz Air is based in the emerging economies of Eastern Europe, and is one of Europe’s leading low-cost carriers. January’s third quarter revenues were up 24% to €423m, making it one of the fastest growing too.
Growth is coming from new routes, but with passenger numbers rising even faster, revenue per kilometre is taking off. At the same time, per seat non-fuel costs, which are among the lowest in the industry, are being held flat.
And we think Wizz could be capable of more.
There are currently around 4.5 times more passengers departing from Western European countries than from emerging European nations. With countries like Poland, Romania, Hungary and Bulgaria expected to deliver much higher growth than the UK and euro zone economies, there’s plenty of scope for that gap to narrow in the future.
The growth potential at Wizz hasn’t gone unnoticed. The shares are more expensive than many peers in the sector, and that means the group needs to operate smoothly in the cyclical airline business. With the group focused on growth, investors shouldn’t expect any dividends to smooth the ups and downs in the short term.
European growth stories are reasonably thin on the ground in the UK market, and stocks plugged in to the emerging economies of Central and Eastern Europe are even rarer. For those looking to benefit from the growth in these markets, we think Wizz Air is one of the more attractive options.
Wizz Air - operating profit
Past performance is not a guide to future returns. Source: Thomson Reuters Eikon as at 30/04/18
Wizz Air share price and charts
Cities across the world are swelling. Globally, the population in medium-sized cities nearly doubled between 1990 and 2014.
The pace of change in the developing world is especially startling. At the turn of the century, China had 58 cities with over 1m people. It now has 102, and is set to exceed 128 within the next seven years. All those people need places to live, as well as cars and trains to get around.
The steel works of industrial China are forging the new world, and it’s Rio fuelling the smelters.
Over the years we’ve seen how growth can be volatile. Investors who rode through the commodity ‘super-cycle’, only for the bottom to drop out, will know as much already.
But prices have bounced from the lows and Rio has patched up a balance sheet that was starting to look stretched. It’s also introduced a conservative policy of linking the dividend to earnings. This should help the group manage the cycle better.
Part of restoring the balance sheet saw Rio sell most of its coal assets, but as far as iron ore is concerned, it has some of the highest quality assets out there. At Pilbara, Western Australia, Rio can produce at $13.40 per tonne, comfortably below 2017’s prevailing price of over $60.
The attractive asset base should mean Rio is capable of delivering profits year-on-year, although of course there are no guarantees.
Rio Tinto share price, charts and research
Standard Chartered, which makes more than 80% of its income from Asia, Africa and the Middle East, is another company looking in better shape than in the recent past.
Key banking metrics are much healthier compared to just a few years ago and the company’s profitability targets are looking more achievable. And there’s clearly ambition to kick on from here in the longer-term.
All this means Standard Chartered’s confident enough to bring back the dividend after scrapping it back in 2015, and the prospective yield currently sits at 2.3%.
The ultra-wealthy still account for a small portion of the business, but the division is growing steadily and offers returns with limited risk, since lending tends to be well secured. There are cross selling opportunities too, not least into the Wealth division.
For all the progress Standard Chartered is certainly not without its risks. Banks are very sensitive to economic ups and downs, and, as Standard Chartered knows only too well, the ups and downs in emerging markets can be particularly volatile.
Standard Chartered share price, charts and research
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.
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