Deep Blue Publications Group LLC - How emerging markets sell-off will hit FTSE 100 shares

Investors fearful about the impact of the emerging-markets crisis on their portfolio may be shocked to discover they have more exposure to a meltdown than they think.

Blue-chip companies listed on the FTSE 100 have poured into China and other emerging markets in recent years in a bid to grab the exciting growth opportunities on offer. As the sentiment toward those regions sours, these companies’ shares are being hit.

If you have an emerging markets fund, you have a pretty good idea what your exposure is. But plenty of big-name British companies and funds are also in the firing line, given that FTSE 100 companies now generate 33pc of their profits from emerging markets.

Companies on the American S&P 500 Index, by comparison, generate only 5pc of their revenues from emerging markets.

This leaves investors with FTSE 100 stocks, index-tracking and actively managed funds with a much higher exposure than they may think.

Last week, investors in spirits company Diageo were feeling punch-drunk after its share price fell more than 6pc in just two days, on slowing sales in China and Nigeria. As a result, Goldman Sachs dropped Diageo from its “buy” list and downgraded it to neutral.

Profits at Unilever, which makes a vast range of goods from PG Tips to Peperami, have been hit by slower demand and weaker currencies in Brazil, India, Russia and Indonesia. A fall in local currencies means the sales made there result in fewer pounds being bought back for British shareholders.

HSBC and Standard Chartered, two FTSE-listed stocks with hefty exposure to Hong Kong and mainland China, have also struggled. The crisis came to head this week with investors withdrawing billions of dollars from emerging-market funds in the biggest sell-off since August 2011.

Markets have been hit by fears of a China slowdown, and the US Federal Reserve’s decision to scale down “quantitative easing” (QE). Instead of flowing into emerging markets, money is being attracted back on the hope of improving rates in America. Brazil, India, Turkey and South Africa have raised rates to protect their currencies.

The FTSE 100 has shed £93bn of value since January 21, with much of those losses down to emerging markets, said Elaine Coverley, head of equity research at wealth manager Brewin Dolphin. “Emerging-market headwinds show few signs of dropping. We have been bearish for some time and continue to be so, although we don’t see the current correction turning into a full-blown crisis.”

Some FTSE 100 stocks could be hit hard, she said. “Global brewer SABMiller is one of the most exposed stocks of all because it generates a mighty 85pc of its sales from Eastern Europe, Latin America, Africa and Asia.

“I’m a bit more bullish about Diageo [which makes 50pc from emerging markets]. Falling sales in China and Thailand have been offset by a 5pc rise at its US spirits division, which is the largest part of its business.”