Emerging Markets: 180,000 New Investment Opportunities… A Day
by Alexander Green, Investment Director
Monday, April 13, 2009: Issue #977
Investors in the West have a poor track record when it comes to the world’s emerging markets. In particular, they have a bad tendency to leave them just when they should love them. This is particularly true today.
Like equity markets everywhere, foreign exchanges in Latin America, Eastern Europe and Asia have taken quite a tumble over the last year and a half.
Yet this is not like the Mexican Peso Crisis of 1994 or the 1997 Asian Financial Crisis. Those downturns were brought on by poor government policies and financial mismanagement in these regions.
But these developing economies have since been rebuilt on sounder financial footing. Moreover, you’ll notice that the recent worldwide sell off in equity markets was brought on by problems with U.S. real estate, mortgage securities and banks, not in developing markets themselves.
Still, in their rush to avoid risk many U.S. investors are leaving – or avoiding – these emerging markets at precisely the wrong time.
Yet the risk premium is much lower than it used to be. Most developing countries have already evolved from communism to democracy and from state-controlled economies to free-market ones. There are plenty of other good reasons to diversify into these markets, too.
Let’s start with the big picture.
Emerging Markets – Covering 85% of the World’s Population
While emerging nations cover 77% of the world’s land area and represent 85% of the world’s population, they currently produce only 23% of the world’s gross domestic product.
That’s changing…
There are now 3.8 billion “middle class” people in the world today. Thanks to emerging markets, that number will double over the next 20 years.
As The Wall Street Journal wrote last month:
“In the next 24 hours, approximately 180,000 people in developing countries will be moving from the countryside to cities such as Shanghai, Sao Paulo, Johannesburg. The same will happen tomorrow and every day thereafter for the next 30 years, the equivalent of creating one new New York City every two months, according to the United Nations. These men and women will need everything, electricity, water, food, health care, shelter, schools, computers and, of course, jobs. Many have the potential to improve not just their local environment but the world.”
Some companies in the West – and, of course, many of those in developing markets themselves – are set to enjoy an extraordinary period of prosperity.
These new consumers will need dishwashers, microwaves, laptops, cell phones, automobiles, eyeglasses, credit cards, pharmaceuticals, insurance and every other product and service we already take for granted in the West.
Why bet on companies that may (or may not) create a new cancer drug or hit a new gold strike or develop a faster computer when you can bet on dead certainties: companies that are busy meeting the enormous untapped needs of billions of new middle class consumers.
January, for example, was the first month ever in which car sales in China topped U.S. car sales. And it may be that way for the rest of your life – and your children’s lives.
Emerging Markets: Promising and Cheap
Right now the world’s emerging markets are both exceptionally promising and extraordinarily cheap.
Moreover, a lot of these developing market stocks are denominated in currencies that are tied to the dollar. (So a stronger greenback like we’ve seen lately won’t hurt them – or the dollar value of your securities.)
No wonder emerging markets manager Mark Mobius says he feels “like a kid in a candy shop.”
The potential in these markets is greater than it has ever been before. Anyone who can count to 180,000 (a day) should understand exactly why.
Good investing,
Alex Green
Today’s Investment U Crib Sheet
Foreign Stocks as a component of Asset Allocation Strategy
Sometimes our readers tell us: “Oh, that means diversify. I already do that.” But that’s not what asset allocation is about. Three years ago you could have diversified into Lehman Brothers, Bear Stearns, Washington Mutual and Citigroup… and gone right off the cliff.
Asset allocation refers to spreading your investments among different asset classes, not just different securities or market sectors. Doing this has allowed us to survive, prosper and build our wealth during the longest bear market since The Great Depression.
We’ve had money invested over the last five years in foreign stocks. While the stock market has gone down, these have gone up. We’ve also had money invested in six other asset classes. And over that 5-year time period we’ve beaten the S&P’s return.
Because different asset classes are imperfectly correlated – some zig while others zag – our model (as shown below) allows you to boost returns while reducing your portfolio’s volatility.
In layman’s terms, proper asset allocation means you can sleep better – knowing that the daily fluctuations of the market will have little impact on your financial security.
Following this model and re-balancing annually ensures our portfolios will be well diversified and positioned to profit in any market condition. And yes, investing success can be this straightforward.
Related Investment U Articles:
- Asia’s Emerging Middle Class Consumption is Powering Up
- Why I’m Banking on Emerging Financial Growth
- The Fed Versus Emerging Markets
- The Impact of QE2 on Emerging Markets
- Collective Brands Strides Overseas
4 Responses to “Emerging Markets: 180,000 New Investment Opportunities… A Day”
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Alexander Green is the Chief Investment Strategist of Investment U. A Wall Street veteran, he has more than 20 years of experience as a research analyst, investment advisor, financial writer and portfolio manager.
Is a Good Investment, How can I Invest In It?
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I am retire this will be a big help for me.
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Thank you for this information Alex. yes, the next boom will be on this markets. Two of the BRIC economies top the first and the second most populous countries. it means more than two billion consumers will need consumer products. that’s why we in the Philippines are cathing up to tap this emerging markets, the only problem here is ” it is very hard to obtain capital ” but we small business people in the Philippines are finding ways to have such capital. thank you again : )
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Big news in the market today (with Google’s acquisition) and another 100+ point swing day. Six straight days now of the DOW going up or down more than 100 points. What will tomorrow bring?
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