Emerging Market Affiliates Outperform their Multinational Parent Companies

Investing in a portfolio of companies like Unilever Pakistan, Nestlé India, and Walmart Mexico may be a more effective way to gain exposure to emerging markets than investing in developed market companies with stakes in emerging markets or in local stock markets.

According to a study by Martijn Cremers, associate professor of finance, emerging market affiliates of large multinational corporations have combined high performance and low volatility, outperforming their parent companies, their local stock markets, and the wider emerging markets over the last 14 years.

The study looked at 92 publicly traded affiliates, with 24 in Asia, 15 in Eastern Europe, 22 in the Middle East, 9 in Africa (all in South Africa), and 22 in Latin America. Their parent companies are listed in developed markets, with the most frequent countries being the UK, the U.S., France, Germany, Italy, Japan, and Spain. Some of the parents, such as Unilever, AES, and the ING Group, have more than one affiliate.

Cremers found that one dollar invested in the group of affiliates in June 1998 would have grown to $23.03 in June 2011, compared to $8.92 in the local market and $4.15 in the parent companies over the same period.

The outperformance of the affiliates wasn't the result of greater volatility. The annualized volatility of the portfolio of affiliates was 24.6%, which is lower than the volatility of their country indices (29.7%), and only slightly above the volatility of their parent companies (21.4%).

Furthermore, the affiliates performed remarkably well during the financial crisis. Each dollar invested at the peak would have resulted in a trough investment of $0.50, which is better than the peak-to-trough performance of both their local stock market and the developed markets.

Cremers attributes the outperformance of the affiliates to two primary factors: improved corporate governance through the large controlling stakes of their multinational parents, and the support from their parent companies, which provide a stabilizing role.

"Both seem critical specifically in financial crises," says Cremers. "These seem to provide affiliates a clear competitive advantage over their local competitors that should endure for the foreseeable future."