Realizing the Immense Potential of Emerging Markets

by Alexander Green

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 & 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.