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Aug. 21, 2018, 7:01 a.m. EDT

Ignore ‘multidecade growth’ companies in emerging markets at your own peril

Motley Fool fund manager Tony Arsta looks way beyond the short-term disruptions that are dominating the news

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By Philip van Doorn, MarketWatch

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Wise investors may want to consider the long-term growth of emerging-markets companies and forget the current turmoil.

Disruptions that have hit currencies in Turkey and Argentina have led to considerable volatility this year, but they don’t have anything to do with the long-term story of increasing spending power among consumers in many emerging economies.

Tony Arsta, one of the lead managers of the Motley Fool Emerging Markets Fund  (the other is Nate Weisshaar), argues that many companies in emerging markets “have multidecade growth in front of them,” and that EM companies focused on local consumers with increasing spending power, such as Alibaba /zigman2/quotes/201948298/composite BABA -1.05% , “are just getting started.”

The Motley Fool Emerging Markets Fund was established in 2011 and is small, with only $35 million in assets under management. But it has a four-star rating (out of five) from Morningstar. We’ll look at some of Arsta’s favorite stocks, but first, here’s a comparison of how emerging-markets stocks have performed against U.S. stocks.

Charts tell the story

Here are four charts comparing the performance of the MSCI Emerging Markets Index /zigman2/quotes/210598082/delayed XX:891800 +1.08%  with that of the S&P 500 Index /zigman2/quotes/210599714/realtime SPX -0.22% . First, 2018:


And now a five-year chart:


Ten years:

The 15-year chart is an eye-opener:


The 10-year chart shows significant outperformance for U.S. stocks as it encompasses the domestic bull market that began in March 2009, as well as greater volatility of the MSCI Emerging Markets Index during that period. But as you go further out, the emerging-market economic growth story shines through.

So the longer-term chart makes a solid case for having broad long-term emerging-markets exposure as part of a diversified portfolio.

In an interview on Aug. 16, Arsta said that “over the past two decades emerging markets have been driven by exports to developed countries. So when there is a shock or slowdown in developed countries, it hurts EM.”

Recent currency shocks are in emerging markets, but not those showing the greatest increases in spending power among consumers. And we may be in for a developed-market shock with the new Italian government’s apparent resistance to the European Union’s suggested remedies for its troubled banking system.

But none of those short- to medium-term threats affect the long-term story of increasing spending power among consumers in China, many other Asian nations, as well as those in Africa and Latin America. So Arsta and his colleagues focus on emerging-market companies that derive most of their growth from the increased spending power of consumers in their local markets.

Companies for ‘multidecade growth’

Getting back to Alibaba, the fifth-largest holding of the Motley Fool Emerging Markets Fund as of June 30, Arsta said the company won’t gain more market share as it already dominates online retail in China, “with JD.com /zigman2/quotes/205122565/composite JD +1.38%  a distant second.” But he believes that won’t be a problem for Alibaba.

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