Emerging Market Rebound Inevitable for FLS Paving Expansion

Laborer Carries Cement Bag At Shakur Basti Station
Cement consumption is surging in developing nations as governments invest in roads and urban construction to support growth. Photographer: Prashanth Vishwanathan/Bloomberg

Investors who dumped their emerging-market assets this year ignored the economic reality on the ground, according to the chief executive officer of FLSmidth & Co. A/S, a Danish company that boasts the world’s biggest installed base of cement production lines used to build everything from roads in India to high-rise towers in Brazil.

“The overall potential will not change,” Thomas Schulz, who runs FLS from Copenhagen, said in an interview. The sell-off “won’t change my view on emerging markets.”

From Argentina to Turkey, emerging markets have been under siege this year as the U.S. Federal Reserve pares its record stimulus measures. Investors also fretted over signs of a slowdown in manufacturing in China, the world’s second-largest economy. Yet the panic may be abating and last week, the MSCI Emerging Markets Index rose the most since September. For long-term investors like Schulz, the sell-off never made much sense.

“Several hundreds of millions of people are moving from the third world to the second world,” the 48-year-old said. “That wish is still there and their local governments, their societies will do their utmost to enable their people to do so, and that drives our business in minerals as well as in cement.”

Gross domestic product growth in India, the world’s largest cement market after China, will accelerate to 5.7 percent in 2015 from 5.1 percent this year, the Organization for Economic Cooperation and Development said Nov. 19. GDP grew 4.8 percent in the third quarter, the nation’s statistics office said on Nov. 29.

Ignoring Goldman

Cement consumption is surging in developing nations as governments invest in roads and urban construction to support growth. In India, which last month fought off capital flight by raising interest rates, FLS now employs almost a quarter of its 15,300-strong workforce.

Schulz isn’t alone in betting emerging market growth will prove enduring. Kristoffer Stensrud, the founder of the Stavanger-based fund Skagen AS, last month dismissed calls by some of Wall Street’s biggest banks to exit developing markets.

The 60-year-old Norwegian investor, who has outperformed funds run by Goldman Sachs Group Inc. and JPMorgan Chase & Co. over the past decade, is telling clients to stay put. So far, Skagen’s Kon-Tiki A emerging market fund has delivered an annualized 14 percent over the past decade, ranking it among the 10 best performers of more than 1,000 funds tracked by Bloomberg.

The MSCI Emerging Markets Index gained as much as 0.9 percent today to rise to its highest since Jan. 23. Shares in FLS rose as much as 3.2 percent and traded 2.5 percent higher at 286.90 kroner at 12:45 p.m. in Copenhagen.


Goldman in December told investors to cut allocations in developing nations by a third predicting a “significant underperformance” for stocks, bonds and currencies over the next 10 years. Goldman advised clients to lower their allocation to 6 percent from 9 percent, citing a lack of economic reforms to improve growth.

The International Monetary Fund kept its growth forecast for developing economies on Jan. 21, and still sees the group’s output expanding 5.1 percent. The IMF raised its outlook for advanced economies to 2.2 percent from the 2 percent estimated in October.

FLS, which has sold cement production lines in India since 1904, has also shifted engineering positions to the country and 23 percent of its employees are now Indians. There are no plans to scale back because of the recent spate of market turmoil, Schulz said.

“There’ll at times be financial market hiccups, but in both directions,” Schulz said.

Right Mix

Developing-nation exchange traded funds in the U.S. had about $100 million of outflows since the MSCI Emerging Markets Index reached this year’s low on Feb. 5, while foreigners pulled $892 million from bourses in South Korea, India and Brazil, data compiled by Bloomberg last week show.

FLS, which also produces mining equipment, last year generated 66 percent of its revenue from developing countries, led by Chile, Brazil and India. The rest came from what the company defines as high-come nations, including the U.S., Australia and Canada.

“This one-third, two-third is a good mix,” Schulz said. “It fluctuates, but as much as we can forecast it, we will maintain that ratio.”

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