by Sam Goh Nai De
Executive Wealth Coach, Wisdom Capital LLP
Over the past few years, many emerging economies have managed to outperform developed economies in the areas of economic growth and stock market performances. Once regarded as the laggards of the global economy a decade ago, emerging countries such as China, Brazil, India and Indonesia etc are now being seen as frontline leaders in terms of growth and investment performances. This is especially so as the US and European countries struggle to cut budget deficits and engulf in addressing their debt woes.
Generally, emerging economies/markets offer potential investment opportunities for investors seeking to diversify and increase their portfolios’ returns. The key question is how can then an investor seek investment opportunities in these emerging economies/markets, especially during current period of time when the markets have demonstrated themselves to be pretty volatile and choppy?
For investors seeking long term capital appreciation and are able to assume relative high levels of volatilities associated with emerging markets, perhaps, a possible suggestion will be to look at investing into these markets through the relevant industry sectors.
Consumer Consumption – Durable and Non Durable Goods
The main point is that majority of the world population is living in emerging economies. For instance, countries like China etc have a population of more than one billion. The UN estimates that the world population will grow from almost 7.2 billion this year (2011) to over 9 billion in 2050. It is worthwhile to highlight that the bulk of this surge in growth will take place primarily in emerging economies/markets. At the same time, it is also important to note that many of these emerging economies have a young and fast growing population, such as Vietnam and India.
These facts and projection mean that companies that are in the business of producing daily consumer goods (durable and non durable) are likely to benefit from the increasing demand from these growth markets. Why is this so? Well, the primary rationale is that these emerging economies are increasing producing a young, rapid growing and thriving middle class who has managed to establish more purchasing power with higher disposable income.
Therefore, this will lead to sustainable and strong volume growth for these companies’ products as the penetration rates of many consumer goods are still relatively low in these countries. In this case, some of the consumer goods include beverages such as liquid milk, vegetable/fruit juices, bottled water to necessities items such as tissues and shampoo etc.
Consumer Consumption – Soft Commodities and Agricultural Products
As mentioned earlier, the world’s population is likely to witness a surge in numbers gradually and it is projected that majority of this increase will come from emerging economies/markets. This increase in the population growth will lead to an increase in demand for agricultural products, especially from emerging economies due to the rising affluence of their middle class families. As a result, we can reasonably expect better standards of living from this population.
If this proposition holds true, then what are the potential implications that may arise as a result of this trend? Well, one implication is that there could be a shift or change in the dietary pattern of this group of people due to the increase in dairy and meat products consumption. This will directly impact agricultural prices due to increased pressure and demand for soft commodities such as grains. On the other hand, special attention will also have to given with regard to the supply of these agricultural products. In this case, supply will be constrained by the increasing number of floods, droughts and natural disasters across the globe.
With all these in mind, agricultural prices may have more upside potential in the long term and companies/producers of these soft commodities and fertilisers will be the main beneficiaries in the long-term.
Rapid Urbanisation – Hard Commodities and Precious Metals
As a result of rapid urbanisation within the emerging economies, demand for hard commodities and precious metals are likely to increase. The argument is that emerging economies are likely to be the main driver with regard to the demand for hard commodities and precious metals. In this case, hard commodities refer to metals with close correlation to construction and property related activities such as copper and steel etc.
If demand is relatively strong, then the key question will be whether supply will be able to address the demand in these resources? In this context, despite gradual increases in supply, it will not be sufficient to offset demand due to a lack of investments. Thus, shortages are likely to occur and this will inflict upward pressures on the prices of hard commodities and precious metals. Therefore, companies/producers of these hard commodities and precious metals will be the main beneficiaries in the long term.
Viable Investment Option for Long Term Investors
As mentioned earlier, emerging economies/markets offer potential investment opportunities for investors seeking to diversify and increase their portfolios’ returns. This is due to their relatively high and sustainable growth. No doubt, the current eurozone debt crisis and the US structural problems will inevitably have an impact and slow down growth in these emerging economies.
However, it is worthwhile to note that these emerging economies are likely to be able to sustain growth in the medium term due to their growing domestic consumption and demand. Thus, for long term investors with relatively long investment time horizon and risk tolerance levels, investing into emerging economies may present a viable investment option for them.
The key to successful emerging markets investing therefore will be to invest appropriately into the companies of the relevant industries/sectors that are likely to benefit as a result of the continual growth in the domestic consumption and rising affluence of the middle class families in these emerging economies.
