For centuries the globe has been divided into the “developed world” and the “non-developed world”. Currently, about 20 percent of the global population lives inside the developed world where most of the economic activity has historically come from. This has started to change, however, and we have seen emerging nations come online into the global economy as the intellectual capital of the other 80 percent of the world’s population begins to be tapped for the first time. This has provided opportunities for economic development around the globe as well as growth opportunities for investment portfolios. Global investing is an important part of a diversified investment strategy, but to do it successfully takes a tremendous amount of research, discipline and understanding of global trends and complexities.
The key elements of a growing economy are large populations, healthy demographics and productivity. Two widely-tracked emerging market groups are the BRICs (Brazil, Russia, India and China) and the N-11 (Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam). The N-11 is a group of diverse countries which represent the next 11 largest populations outside of the BRICs and the Developed Nations. Together, these nations are home to about 4 billion people, or two-thirds of the world’s population.
Much of the world’s population growth over the next several decades is expected to occur in emerging nations such as these. Additionally, since many of these populations are very young, their workforce is expected to expand rapidly in the coming years. For example, over the next 25 to 30 years, India’s working population is expected to grow by about 300 million people. To put that into perspective, this is approximately the number of people that currently live inside the United States. About 60 percent of Egypt’s population is under the age of 30, and about 43 percent of the population in Nigeria is under the age of 15.
We have also seen a big increase in economic output from emerging nations as measured by GDP, or the monetary value of all finished goods and services produced within a country’s borders.
As illustrated in Chart 1, IMF data shows that over the last 20 years, a growing percentage of the World GDP has come from emerging economies. In fact, the IMF predicts that in 2013, emerging economies will actually output more than developed economies. Much of this growth is driven by consumption in the developed world and in the form of manufacturing production (fueled by lower wage bases) and exports (fueled by high commodity prices). The shift in share of World GDP does not translate into a downg rade in relevance for developed world nations. While countries in the developed world are becoming a smaller percentage of a growing total World GDP, they are still more productive on a GDP per capita basis. Additionally, the slowdown in growth and consumption in the developed world may result in slower growth in areas of the emerging market economies as well.
Making Money in Emerging Markets
While the economic growth in some emerging nations has been impressive and widely tracked in the media, this does not always translate into positive stock market returns. In 2011, for example, China’s GDP grew by 9.1 percent yet their stock market was down 18.3 percent (see Chart 2).
Typically, factors such as valuation, capital flows into and out of a country, earnings growth of companies, and market surprises can influence market returns more than GDP. Investing in emerging markets can be very volatile because of a variety of additional risks such as political stability, currency stability, and infrastructure issues. However, point-to-point over proper time horizons, emerging markets can provide tremendous growth opportunities.
Investing strategies in the emerging markets can include 1) direct investments in foreign companies, or 2) indirect investments in U.S. multinational/global companies that do business in the emerging markets.
One of the big investment themes related to emerging markets is that of the “emerging consumer.” The Brookings Institution estimates that since 2005, an estimated 500 million people have escaped from global poverty. Additionally, they estimate that the global middle class will increase from 2 billion to 5 billion people by 2030. These predictions have huge implications for the people of emerging nations as well as businesses across the globe. Chart 3 is a Basic Consumption Pyramid that shows what people typically buy as their incomes increase. It illustrates that as people come out of poverty, they typically become consumers of Essential Goods and Services such as bottled water, soap and toothpaste. Global companies like Unilever and Proctor & Gamble will have whole new markets open up to them as these demographic shifts occur. As the chart indicates, as income increases, so does the diversity of goods an individual consumes.
How Brightworth Takes Advantage of Global Growth Opportunities
Brightworth has been investing in stocks benefitting from the growth in emerging markets for a long time through the managers in our Global Investment Strategy. Our U.S. managers are investing in many companies that are domiciled here in the United States but doing a significant and growing portion of their business overseas in emerging markets. Additionally, we hire international and global managers that have the flexibility to invest in the best opportunities they see in both developed and emerging market stocks. These managers increase and decrease their allocation to emerging market stocks depending on the valuations and opportunities they find over time.
This is an exciting time as billions of people around the world come out of poverty and begin participating in the global economy. Ongoing technological advances should continue to leverage our population to make us more productive and increase opportunities throughout the world. With the proper prudence and the right time horizon, this can also be an exciting growth opportunity for your portfolio. Our Brightworth team has been tracking these trends for over a decade and working to find growth around the globe for our clients’ investment portfolios.