Tony Daltorio: Investors have had one reaction to emerging markets in 2015: They are running as fast as they can in the opposite direction.
The third quarter saw investors sell $40 billion of emerging-market securities. This was the worst sell-off since the fourth quarter of 2008, in the midst of the global financial crisis.
Even though conditions seem to have stabilized somewhat in October, emerging markets still remain an unloved asset.
That appeals to a contrarian investor like me. But you can’t just go in and buy emerging markets blindly. You have to be selective.
Emerging-markets guru Mark Mobius of Franklin Templeton Investments summed up the reasons for optimism succinctly.
Mobius said: “The long-term outlook is very good for two important reasons. First, at the present time many investors are underweight in emerging markets. Second, emerging markets continue to experience more than double the growth of developed markets.”
Emerging Markets Still Growing
This economic growth pattern has been in place for well over a decade. When measured by purchasing power parity (which accounts for exchange rate changes), developed markets’ share of global gross domestic product has dropped from 54% in 2004 to 43% today. So the developing world already accounts for more than half the world’s GDP.
The International Monetary Fund forecast that developing markets’ economic growth will continue to grow at double the pace of the developed world over the next five years. That growth will be led by urbanization in the developing world.
Richard Dobbs, director of McKinsey Global Institute, shared his insight in a piece he wrote for the Financial Times. He said that over the next decade, urbanization in the emerging economies would result in these economies accounting for as much as three-quarters of world economic growth.
He may be too optimistic on the actual number. But no doubt, emerging markets will continue to account for a bigger and bigger slice of the world’s economic pie in the years ahead.
The Emerging-Market Consumer
One key factor behind the urbanization that Dobbs was talking about is demographics.
Younger populations dominate the developing world. People under 40 are just entering the most productive years of their lives, starting families and consuming. The emergence of the consumer is the key for me when investing in emerging markets.
Dobbs is forecasting the size of the emerging consumer class will quadruple over the next decade. He says urban consumers may spend an additional $20 trillion annually by 2025.
The prospect of large urban centers springing up in China, India and elsewhere is exciting. China already is the world’s fastest-growing consumer market.
Despite other parts of its economy stalling, momentum continues in Chinese consumerism. The latest batch of economic data shows the services sector grew 8.6% in the third quarter. That is up from 8.4% in the first half of 2015.
The services sector includes consumer areas such as passenger rail transport, air travel, tourism and movie box office receipts, the latter of which totaled $4.8 billion last year. These numbers are less prone to exaggeration by the Chinese government than industrial numbers.
A Contrarian Investment Bet
How can investors play the emerging-market consumer sector?
There are a number a fine companies out there, but many of them do not trade in the U.S. or else trade very thinly.
So I’m going the ETF route with the EGShares Emerging Markets Consumer ETF (NYSEARCA:ECON).