When investors allocate to emerging markets, they typically do so through broad-based market cap-weighted exposure. More recently, investors have shown interest in specific cuts or subsets of the broader emerging markets, such as country rotation, high-dividend-yield strategies, small caps, low volatility and other investment strategies.
We’ve seen growing interest in the degree of exposure to state-owned enterprises (SOE) in various investment strategies. State-owned enterprises are typically defined as companies that are either wholly or partially owned or operated by a government. Some investors believe that government ownership can negatively impact the operational aspects of a company because government-owned companies might be influenced by a broader set of interests, beyond generating profits for shareholders.
Characteristics of State-Owned Enterprises
State ownership levels can vary significantly among sectors and countries, depending both on a sector’s significance for providing public goods or fostering economic growth and on the governmental structure. WisdomTree identified 424 companies out of an initial 3,000 companies in emerging markets as state-owned enterprises (SOE), with government owning more than 20% of shares. The SOEs had market cap of over $1.31 trillion, about 26% of the original universe’s market cap of approximately $5.07 trillion.1 Figures 1 and 2 illustrate the market cap profiles of the SOE universe by sectors and countries.
Figure 1: State-Owned Enterprises by Sector
• Ownership Concentrated among Public Good Sectors: Given that the Financials, Energy, Telecom and Utilities sectors are among the most systemically important sectors to economic development, we are not surprised that governments tend to play a more active role in these sectors.
• Less Ownership among Private Good Sectors: Currently, governments are less involved in the Consumer Discretionary and Consumer Staples, Information Technology and Health Care sectors. Companies in many consumer-focused sectors tend to be less vital to the strategic economic development and welfare of emerging market governments. These sectors also are often the focus for growth investors who see a burgeoning opportunity as emerging market consumers develop and increase their income and standard of living.
Figure 2: State-Owned Enterprises by Country
• China Displayed the Largest Government Involvement: Given China’s communist background, it is not surprising that almost half of the SOE market cap companies are Chinese companies. A large percentage of the Chinese government’s market cap ownership comes from the stakes it holds in the country’s large financial institutions. These large state-owned banks are among the lowest-priced areas of the entire emerging markets, with average dividend yields over 6% and price-to-earnings (P/E) ratios below 5x.2