As Coke’s third largest market – trailing only the United States and Mexico – China is already a centerpiece of the company’s global growth strategy. When the company announced better-than-expected fourth-quarter results last month, it reported that China jumped 29% last year, while U.S. sales actually fell by 1%.

So it’s no surprise that China will overtake both Mexico and the United States to become the company’s largest market by 2018, Coke President and Chief Executive Officer Muhtar Kent told The Financial Times.

The $2 billion Coke has earmarked for China includes $90 million for a research-and-development center in Shanghai, the financial center on China’s East Coast. It also includes capital for new production plants, distribution infrastructure, and sales and marketing. However, it does not include Coke’s pending buyout of China Huiyuan Juice Group Ltd., China’s largest juice company.

Coke launched a $2.4 billion bid for Huiyuan Juice last September. At HK$12.20 a share, the deal valued Huiyuan at a 195% premium to its market value prior to the offer. But even though the deal is generous by most standards, government approval is still pending.

Huiyuan Juice is a household name in China, and controls 42% of the country’s pure-fruit-juice market. Regulators are debating whether a partnership with Coca-Cola – which controls 54% of China’s soda market – would be in violation of newly enacted monopoly laws. PepsiCo Inc. (PEP) has just a 31% share of China’s soda market.

The buyout is further complicated by strong nationalistic feelings, similar to those sparked in the United States when InBev NV went public with its bid for Anheuser Busch. However, many state-run Chinese companies have aggressively pursued foreign targets, which could make it hard for China to close the door on Coke.

In Australia, for instance, the government has a few Chinese investments coming under review:

• Hunan Valin Iron and Steel Group Co. is attempting to expand its stake in Fortescue Metals Group Ltd. to 17.4%.
• China Minmetals Corp. has launched a $1.7 billion bid for OZ Minerals Ltd.
• And Aluminum Corp. (ADR: ACH) of China plans to invest $19.5 billion in Rio Tinto PLC (ADR: RTP), the world’s third-largest mining company.

If Beijing sends Coke packing, it could send a message to the rest of the world that China plays by different rules at home than it does abroad. Many investors are also waiting on the Coke deal as a barometer of China’s attitude towards inbound M&A deals, and Beijing’s willingness to cooperate.

The deadline for the deal’s completion – March 23 – is a little more than a week away. And while China Commerce Minister Chen Deming has said that Beijing’s decision “will not be influenced by any (external) factors,” some analysts think Coke’s recent announcement could help tip the scales in its favor.

“Coca-Cola’s investment is a positive for the Huiyuan acquisition,” Kevin Luo, a consumer goods analyst with Guotai Junan Securities HK Ltd., told Bloomberg News. “This investment will help create jobs, which would obviously be welcomed by the government, so even though it won’t have a direct impact on the acquisition’s approval, it can’t hurt.”

A recent government survey showed that slightly more than 15% of China’s 130 million migrant workers – about 20 million people – had lost their jobs and returned to the countryside by the start of the Chinese Spring Festival on Jan. 25.

Regardless of the deal’s outcome, CEO Kent says Coke has only “scratched the surface” of the Chinese market and will continue to further its presence in the region.

“Coca-Cola is proud to be a long-term partner of China, and our commitment and confidence in China never wavers,” Kent said.

Long History

Coke has a long history in China. The company first opened bottling plants in Shanghai and Tianjin in 1927. A third plant opened in Qingdao in 1930, according to the Asian Institute of Management’s AIM Center for Corporate Responsibility.

The company re-entered China in 1979 – after a three-decade absence – following the re-establishment of relations between China and the United States. In fact, Coca-Cola was the first U.S. consumer product to return to that promising Asian market.

It had its first new plant up and running in China a year later. By the end of the 1990s, it had several dozen plants and bottling operations in that market.

Coke Rides International Growth to Profit

In announcing the better-than-expected results last month, Coca-Cola reported its ninth-straight quarter of double-digit earnings per share (EPS) growth and third straight year of meeting or exceeding its long-term-growth targets. Excluding one-time items, the Atlanta-based company’s 64-cent EPS represented a 10% gain from last year’s fourth quarter.

For all of last year, cash flow from operations was $7.6 billion, an increase of 6% from the $7.1 billion recorded for 2008.

And at a time when many U.S. companies are cutting their dividends – or eliminating them altogether – Coke boosted its payout by 8%.

“Simply said, we were built for times like these,” Coke CEO Kent said during a conference call. “We enter 2009 with the same mindset as one year ago: Deliver on a consistent set of strategies and initiatives that provide us a disciplined road map to operate in the best consumer business in the world, a business with significant long-term opportunities.”

A large part of Coke’s growth can be attributed to the company’s international sales, which – with a boost from China – delivered 6% growth for both the fourth quarter and full year.

“Because 75% of the company’s sales come from outside the United States, this is the kind of stock that’s worth owning long-term,” Money Morning Contributing Editor Horacio Marquez said in a recent ‘Buy, Sell or Hold’ column. “So, if you are worried about the housing meltdown and the prospects for the U.S. economy, this soundly-managed U.S. company already gives you global diversification in the places that matter most today – the emerging markets.”

Source: Hot Stocks: Coke’s $2 Billion China Play Will Add Fizz to its Profits

This from Martin:

If you’re an emerging-markets investor, and you happened to peruse the study that the Institute for International Finance released this week, you must’ve experienced alarm – if not panic. The IIF expects the inflow of private funds into these markets to plunge to only $165 billion this year – an amount that’s just 18% of the $929 billion that flowed into these very same markets in 2007.

For investors, the message is clear: We’d better concentrate on those emerging markets whose inhabitants have hefty piggybanks of their own.

The details of the investment slowdown are as alarming as the headline. Bank loans to emerging markets will decline from an inflow of $165 billion to a net outflow of $61 billion. Private non-bank debt investment will decline from $125 billion to $31 billion, and even official flows will decline from $41 billion to $29 billion.

Net portfolio equity investment will remain negative, though the outflow will be only $3 billion compared to 2008’s $89 billion. Only direct foreign investment will increase, rising 12% from 2008 to $195 billion.

In terms of regions, emerging Europe will suffer worst, with inflows plummeting from 13% of regional gross domestic product (GDP) in 2007 to just 1% in 2009. Latin America will also suffer, with inflows dropping from 11% of regional GDP to 3%.

Overall, inflows to emerging markets will drop by 5.8% of emerging market GDP between 2007 and 2009 – almost double the declines of the late 1990s crisis (3.7% of emerging market GDP) and early 1980s (3.2%). Emerging market cash flows will also be affected by the need to repay $223 billion of private market debt this year.

This will cause a reordering of the economic pecking order in the emerging markets.

From 2003 to 2007, the availability of natural resources and/or cheap labor was more important than high foreign reserves or a big domestic savings base, so Argentina (natural resources) and emerging Europe (cheap labor, relative to the EU average) did well.

In 2009, access to capital will be more critical than either of those other strengths. Countries without a large domestic savings base, or with substantial balance-of-payments deficits, or with low foreign exchange reserves, are likely to suffer badly.

Many emerging Europe countries have balance of payments deficits exceeding 10% of GDP so will suffer badly. Within that region, the Baltic states – fairly uncorrupt and friendly to foreign investment – will do much better than Romania and Bulgaria, which are both corrupt and xenophobic.

In Latin America, Brazil has an excellent domestic savings base, which it has been nurtured by policies that keep interest rates much higher than the rate of inflation. It is also quite friendly to foreign direct investment. Hence, in spite of its high foreign debt, Brazil should do fine.

Conversely, Mexico has a lower domestic savings base, relies heavily on remittances from Mexicans in the United States (which have declined sharply) and is quite hostile to foreign investment, particularly in the energy sector. Hence it is likely to have a tough year.

In Asia, China – with huge domestic savings, $1.95 trillion in foreign exchange reserves, and low foreign borrowing – will do fine. Conversely, India’s high domestic savings are offset by a profligate government, which runs a wasteful deficit of more than 10% of GDP. Hence India is quite reliant on foreign borrowing, and is likely to have problems.

Which ETFs the Pros are Buying

For investors, the message is clear. Our emerging markets investments must be concentrated in countries that will not be badly affected by the decline in foreign capital inflows, preferably where domestic savers have piggybanks that are large enough to fund expansion locally.

In particular, without delving into particular stocks, the following country-specific exchange traded funds (ETFs) are worth looking at:

• The iShares MSCI Brazil Index (EWZ) has net assets of $3.4 billion, a Price/Earnings (P/E) ratio of 7.0, and a dividend yield of 6%. Money Morning Contributing Editor Horacio Marquez recently recommended this Brazilian ETF in this weekly “Buy, Sell or Hold” series.
• The iShares MSCI Chile investable Index (ECH) has net assets of only $112 million and a P/E of 13. However, Chile is interesting because it built up a reserve fund of $21 billion (12% of GDP) during the years when copper prices were high – it is thus not dependent on foreign-fund inflows.
• The iShares FTSE/Xinhua China 25 Index (FXI) invests in the 25 largest Chinese companies. Net assets are $5.9 billion, its P/E ratio 10, and its yield 2.7%.
• The iShares MSCI Taiwan Index (EWT) has net assets of $1.3 billion, a P/E of 9 and a yield of 8%. Taiwan is highly liquid, with large reserves, a high savings rate and almost no foreign debt
• The iShares MSCI Singapore Index (EWS) has net assets of $800 million, a P/E of 9 and a yield of 8%. Like Taiwan, Singapore is highly liquid, with large foreign exchange reserves and little debt. Taiwanese and Singapore companies may indeed benefit from the liquidity crunch by finding attractive investment opportunities in regional cash-short emerging markets with high growth potential, such as Vietnam.

Source: The Five Most Promising Emerging Market ETFs for 2009

Speaking to Thomson Reuters, Matthias Siller, an emerging markets investment strategist at Baring Asset Management said, “You can make a strong case that emerging markets are well-placed in any scenario going forward – many of them are enjoying a commodities boom and many of their companies are ridiculously cheap at current valuations.”

“As long as we’re seeing strong commodity prices, the implication is that the emerging markets are still growing. The supply constraints in commodities are here for at least several more years, so these stocks should continue to do well,” said Walter Hellwig, who helps oversee $30 billion at Morgan Asset Management in Birmingham, Alabama, speaking to Bloomberg.

“The combined gross domestic product of the four BRIC [Brazil, Russia, India and China] nations made up 12% of global GDP last year”, says Profit Watch editor Manraaj Singh.

“That’s up from just 8% in 2000. That’s impressive enough, but these countries still have a long way to go. Goldman Sachs predicts that the BRIC economies, as a whole, could overtake the G7 countries by 2035. Most of us will be around to see that happen. The rapid rise of the BRICs has been fantastic news for early investors in those markets. In the past two years, shares in the BRIC nations have risen by 70% – and that’s after the recent declines. The average increase in emerging markets overall was 42%.”

Investors need to be aware of the risk posed by emerging markets investments, says Money Week editor Merryn Somerset Webb.

“In April, the Brazilian central bank hiked rates by 0.5% to 11.75%, and with growth strong, inflation back to 4.7% and inflation expectations rising steadily, rates may have to go higher than the 13% economists are penciling in.

“As the past year has shown, Brazil will not be immune to a likely relapse in global markets amid fears over the American and global economies – note that the Bovespa index is highly cyclical, with the energy and materials sectors comprising 60% of the index. There will probably be better long-term buying opportunities in the months ahead.”