Potential Outlook
Despite market concerns over China’s economic growth prospects, it is expected that domestic consumption will continue to grow steadily due to the country’s colossal potential purchasing power.4
The Great Wall Motor Company is aggressively investing in its brand, trying to grow market share through constant improvement of its product mix via yearly updates and by launching new products such as the Haval H2, H7 and H8 models.
Since investors are easily enamored with the theme of consumer growth in emerging markets, we believe that valuation risk is one of the single greatest risks to consumer-oriented stocks and sectors in the emerging markets today. Even after discussing the above profitability growth, one might consider Great Wall Motor Company as potentially overvalued after it has grown over 90% for the first 10 months of the year, but we would point to both the price-to-earnings ratio and growth expectations for perspective. Although it is currently trading at a higher valuation than both the domestic and broader emerging markets from a price-to-earnings ratio, it doesn’t look overvalued after incorporating its expected growth expectations, displayed through the PEG ratio.
Conclusion
Regardless of WTEMCG’s current positioning, the biggest ongoing benefit of the methodology, I believe, comes from the ongoing disciplined rebalancing process. The fast growth rates of autos in emerging countries and large numbers of possible purchases are two elements that have the potential to make investors forget some of the more basic elements of investing—such as valuation. From a selection standpoint, for constituents to maintain inclusion, higher earnings yields will be favored over lower earnings yields. From a weighting standpoint, qualifying firms whose price levels rise but whose earnings stay stable or decline will tend to see reductions in weight. At each annual rebalance, depending on the market environment, the natural focus of the Index will continue to be sensitive to valuation. The Great Wall Motor Company exemplifies the theme of the WTEMCG, as it is a company well positioned to benefit from a major macroeconomic trend of a rising consumer and middle class in China—but the investment strategy has a disciplined focus on valuations, and GWM does not appear expensive, given its growth trajectory.
For current holdings of the WisdomTree Emerging Markets Consumer Growth Index, please click here.
1Source: http://www.gwm-global.com/company/index.html.
2Source: http://www.gwm-global.com/company/index.html.
3Source: Great Wall Motor Company 2013 Interim Report.
4Sources: Great Wall Motor Company and China Association of Automobile Manufacturers.
5Source: Great Wall Motor Company 2013 Interim Report.
Important Risks Related to this Article
Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty.