Global capital is chasing emerging consumers as the best growth prospect out there right now, but by this point some of these stocks look a little dangerously rich. On the surface, it is exciting that the MSCI emerging markets consumer discretionary index -- the "holy grail" for strategic investors these days -- is trading at 2.52 times net assets.
That is the premium that the markets are placing on emerging retailers, airlines and other businesses in the emerging world that cater to the middle class. By comparison, global consumer discretionary stocks are only trading at a price-to-assets ratio of 1.81. After all, on average, emerging economies are growing about 2 to 3 times as fast as their developed counterparts.
And as the share of the global middle class that lives in North America, Western Europe and developed Asia shrinks from about 50% today to under 10% by 2030, momentum clearly favors companies that can compete in these new markets. As a result, on a comparative basis, the "emerging premium" that investors are willing to pay for these companies is higher than it has been in at least 15 years.
The question is whether these stocks can get much richer from here. Wall Street currently thinks emerging consumer will underperform in the next year, gaining only around 3% compared to a full-spectrum target of 11%. This is a theme we wrestle with every day. In the long term, these are the best things out there -- truly the holy grail for anyone who wants a piece of the economic status quo on the horizon -- and people and corporate buyers alike will keep gravitating to this sector.
As a bonus, emerging consumer stocks tend to be more transparent in terms of governance and even management allegiance than the big state-controlled commodity plays. You do not need to look further back than Vladimir Putin's intervention in the shareholder relations of Norilsk (NILSY.PK) for proof of that -- and Moscow is not even a strategic owner of that company. Petrobras (PBR), CNOOC (CEO), Sinopec (SHI), Gazprom (OGZPY.PK): all state-controlled enterprises.
But it always comes back to valuation. If emerging consumer stocks remain rich and margins are not expanding fast enough to compensate -- or if growth falters -- they will eventually be sold.
How to Get Exposure
And for the vibrant Brazilian middle class, BRAQ is the pure play:
Disclosure: No positions