Emerging Markets Will Lead the Way in World Economic Growth
By: Hans Wagner,
dated January 21st, 2010
Emerging markets, especially China, Brazil, India, much of Asia and other
parts of Latin America will lead the rest of the world in economic growth. As a
multi-year trend, this is continuation of one of the best investing themes from
2009. Demand for commodities such as copper and steel will be critical for this
growth. The economic growth of these countries is encouraging the emergence of a
new middle class.
For example, the World Bank estimates that the global middle class is likely
to grow from 430 million in 2000 to 1.15 billion in 2030. The bank defines the
middle class as earners making between $10 and $20 a day, adjusted for local
prices. This is roughly the range of average incomes between Brazil ($10) and
Italy ($20). South Korea has rebounded from the recession and will once again be
a leading economic power in the region.
Asia and Latin America Drive Growth
We are looking for the emerging markets to grow significantly in 2010 with
China coming in at 9-10%, India in at 7-8%, Russia and Brazil in the 5% range.
This growth comes from government economic stimulus as well as more spending by
consumers and business.
In China, economists expect the country’s “middle class” will exceed the
total population of the United States by 2015. Overtaking the United States,
more than 12.7 million cars and trucks will be sold in China this year, up 44
percent from the previous year and surpassing the 10.3 million forecast in the
U.S., according to J.D. Power and
Associates.
India’s economy has produced a 250 million strong middle class that is just
beginning to consumer goods.
For investors, the expansion of the middle class in these countries will spur
demand for consumer goods and better food, leading to more trade that encourages
exports from the U.S. It also will help multi-national companies that are
aligned with these growth waves to see stronger growth.
The commodity, industrial, and energy sectors should benefit as they provide
many of the products for the emerging countries. Demand for technology products
will increase, especially anything to do with wireless communication.
This demand for commodities will help drive growth in Latin America,
especially Brazil, Argentina, and Chile. China has been developing relationships
with a number of Latin American countries to help secure long-term access to
commodities and agriculture products. This will show up in better than average
GDP growth for several Latin American countries.
Finally, helping to drive the value of the emerging markets will be the
structural weakness of the developed countries due to their large and growing
debt problems. Investors will seek higher returns by moving their capital to
countries and companies that have better long-term growth prospects.
Risks from Emerging Markets
As with any investment strategy, it is best to understand the risks you face
before making a commitment. That way you can develop appropriate contingency
plans and hedges should the risk become reality. Investing in emerging markets
involves four risks:
China revalues the Renminbi (RMB).
Should China revalue their currency, it will increase the cost of their exports
and lower the cost of their imports, assuming all other prices remain the same.
A higher price on China’s exports means all the goods imports from China to the
U.S. will cost more.
Action to take: Most likely any revaluation will be small,
as China does not want to risk hurting their export-oriented economy. Monitor
news reports relating this potential and be ready to reduce your exposure to
China should this become likely.
Central Banks tighten credit earlier than many think. Should the central
banks tighten their credit sooner than many expect, investors should expect the
cost of money to rise more rapidly, slowing growth.
Action to take: The Federal Reserve is trying to telegraph
their actions in advance. Monitor their communications to identify when and by
how much they might tighten credit. Small changes should be expected and will
not cause a problem. If the U.S. economy recovers faster and achieves higher
growth rates than many expect, the likelihood of tighter credit
grows.
U.S. economic recovery fades. If the U.S. economy slows or does not achieve
the expected 3.0% growth, meager as it is, it will act as a break on the growth
of the rest of the world, slowing their growth as well.
Action to take: Monitor growth of the U.S economy,
especially reported earnings. If earnings and revenue growth do not achieve
expectations, it is an early sign that growth in the economy may be slowing.
Also, monitor the jog picture. If the economy is unable to generate positive job
growth, it is another sign that the recovery in the U.S. is
floundering.
The Bottom Line
As a multi-year event, investing in the emerging markets offers investors the
best opportunities for 2010. Look to the ETFs that concentrate in
the emerging market countries mentioned as well as companies that have
substantial exposure to these countries.
By: Hans Wagner,
dated January 21st, 2010
Emerging markets, especially China, Brazil, India, much of Asia and other
parts of Latin America will lead the rest of the world in economic growth. As a
multi-year trend, this is continuation of one of the best investing themes from
2009. Demand for commodities such as copper and steel will be critical for this
growth. The economic growth of these countries is encouraging the emergence of a
new middle class.
For example, the World Bank estimates that the global middle class is likely
to grow from 430 million in 2000 to 1.15 billion in 2030. The bank defines the
middle class as earners making between $10 and $20 a day, adjusted for local
prices. This is roughly the range of average incomes between Brazil ($10) and
Italy ($20). South Korea has rebounded from the recession and will once again be
a leading economic power in the region.
Asia and Latin America Drive Growth
We are looking for the emerging markets to grow significantly in 2010 with
China coming in at 9-10%, India in at 7-8%, Russia and Brazil in the 5% range.
This growth comes from government economic stimulus as well as more spending by
consumers and business.
In China, economists expect the country’s “middle class” will exceed the
total population of the United States by 2015. Overtaking the United States,
more than 12.7 million cars and trucks will be sold in China this year, up 44
percent from the previous year and surpassing the 10.3 million forecast in the
U.S., according to J.D. Power and
Associates.
India’s economy has produced a 250 million strong middle class that is just
beginning to consumer goods.
For investors, the expansion of the middle class in these countries will spur
demand for consumer goods and better food, leading to more trade that encourages
exports from the U.S. It also will help multi-national companies that are
aligned with these growth waves to see stronger growth.
The commodity, industrial, and energy sectors should benefit as they provide
many of the products for the emerging countries. Demand for technology products
will increase, especially anything to do with wireless communication.
This demand for commodities will help drive growth in Latin America,
especially Brazil, Argentina, and Chile. China has been developing relationships
with a number of Latin American countries to help secure long-term access to
commodities and agriculture products. This will show up in better than average
GDP growth for several Latin American countries.
Finally, helping to drive the value of the emerging markets will be the
structural weakness of the developed countries due to their large and growing
debt problems. Investors will seek higher returns by moving their capital to
countries and companies that have better long-term growth prospects.
Risks from Emerging Markets
As with any investment strategy, it is best to understand the risks you face
before making a commitment. That way you can develop appropriate contingency
plans and hedges should the risk become reality. Investing in emerging markets
involves four risks:
- Government budgets become more difficult to fund. Should the governments
find it more difficult to fund their growing deficits, interest rates will rise
higher than many expect. As a result, it will curtail any further economic
growth. - Action to take: Monitor interest rates over time to see if
they stay within expected levels or suddenly rise. If rates rise, be prepared to
reduce your exposure to the emerging markets.
Should China revalue their currency, it will increase the cost of their exports
and lower the cost of their imports, assuming all other prices remain the same.
A higher price on China’s exports means all the goods imports from China to the
U.S. will cost more.
as China does not want to risk hurting their export-oriented economy. Monitor
news reports relating this potential and be ready to reduce your exposure to
China should this become likely.
banks tighten their credit sooner than many expect, investors should expect the
cost of money to rise more rapidly, slowing growth.
their actions in advance. Monitor their communications to identify when and by
how much they might tighten credit. Small changes should be expected and will
not cause a problem. If the U.S. economy recovers faster and achieves higher
growth rates than many expect, the likelihood of tighter credit
grows.
the expected 3.0% growth, meager as it is, it will act as a break on the growth
of the rest of the world, slowing their growth as well.
especially reported earnings. If earnings and revenue growth do not achieve
expectations, it is an early sign that growth in the economy may be slowing.
Also, monitor the jog picture. If the economy is unable to generate positive job
growth, it is another sign that the recovery in the U.S. is
floundering.
The Bottom Line
As a multi-year event, investing in the emerging markets offers investors the
best opportunities for 2010. Look to the ETFs that concentrate in
the emerging market countries mentioned as well as companies that have
substantial exposure to these countries.