Investment Contrarians

Why You Need to Look to the Emerging Markets for Growth

By for Investment Contrarians |

Emerging Markets for GrowthThe key to the global economy is a rise in consumer spending. My view is that the emerging markets will continue to be an excellent place to invest some capital, whether it’s the BRIC countries (Brazil, Russia, India, and China) or the Southeast Asian “Little Tigers,” comprising Hong Kong, Singapore, South Korea, and Taiwan. I’m bullish on this area of the world. My reasoning is that the newfound wealth and growing middle class in these markets will drive consumer spending and economic growth.

Famed technical analyst Louise Yamada is looking positively at the emerging markets and believes they can outperform the U.S. market. (Source: Macke, J., “Emerging Markets Set to Outperform the U.S. Says Yamada,” Yahoo! Finance web site, January 17, 2013.)

A good indicator of global consumer spending patterns is MasterCard Incorporated (NYSE/MA), since the company has a presence in over 210 countries. In a third-quarter press release, MasterCard reported that its worldwide purchase volume surged 12% in the third quarter on a local currency basis. In the press release, MasterCard President and CEO, Ajay Banga, also noted that emerging markets continue to provide opportunities for growth. (Source: “MasterCard Incorporated Reports Third-Quarter 2012 Financial Results,” MasterCard Incorporated web site, October 31, 2012, last accessed January 21, 2013.)

What is interesting is the emergence of credit in the emerging markets, where cash has long been king. In these growth regions, the per-capita income is rising, helping to drive consumer spending and economic growth.

Just take a look at the iShares MSCI Emerging Markets Index (NYSEArca/EEM) chart that shows the stock market rally since mid-November 2012.

iShares MSCI Emerging Markets Chart

 Chart courtesy of www.StockCharts.com

The BRIC region is showing decent market returns to start 2013.

The Brazilian benchmark Bovespa Index is up nearly two percent in January, while the Russian RTX Index is up a whopping 4.2%. Stock returns in India and China (two major regions) are up 2.5% (Sensex) and 1.9% (Shanghai Composite Index), respectively in January.

China and India will be the explosive areas for consumer spending given that over one-third of the world’s population lives in this area. There’s growing wealth here, and people want to spend.

According to consulting firm Bain & Company’s web site, “China, followed by India and other emerging Asian economies, is creating a vast new population of consumers, whose growth will continue into the coming decade. (Source: Harris, K., et al., “The Great Eight: Trillion-Dollar Growth Trends to 2020,” Bain & Company web site, September 9, 2011, last accessed January 21, 2013.) The research suggested that about two-thirds of the world’s growth in the middle class will be derived from China and India, and that will translate into higher consumer spending.

On a smaller but equally important scale, the Little Tigers could be a place to invest some money, given the strong consumer spending.

South Korea, the fourth-largest economy in Asia, grew at 6.1% in 2010, but growth is estimated to fall to 3.5% this year, according to the Bank of Korea.

Latin America is also hot for growth in consumer spending. The region’s GDP growth is estimated to slow to 3.7% this year, down from 4.5% in 2011, according to the International Monetary Fund (IMF). On the plus, growth is expected to rally to 4.1% in 2013. The key player in Latin America is Brazil, with its strong consumer spending and the upcoming FIFA World Cup and 2016 Summer Olympics.

Another emerging region that will see strong consumer spending growth is Eastern Europe—namely in Russia, the largest economy in Eastern Europe, and Poland, the second-largest economy in the region.

So while the U.S. markets are returning strong gains this year, to diversify and add potentially higher returns, the emerging markets are worth a closer look.

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