Emerging markets, especially China, Brazil, India, much of Asia
and other parts of Latin America will lead the rest of the world in
economic growth. As a multi-year trend, this is continuation of one
of the best investing themes from 2009. Demand for commodities such
as copper and steel will be critical for this growth. The economic
growth of these countries is encouraging the emergence of a new
For example, the World Bank estimates that the global middle
class is likely to grow from 430 million in 2000 to 1.15 billion in
2030. The bank defines the middle class as earners making between
$10 and $20 a day, adjusted for local prices. This is roughly the
range of average incomes between Brazil ($10) and Italy ($20).
South Korea has rebounded from the recession and will once again be
a leading economic power in the region.
Asia and Latin America Drive Growth
We are looking for the emerging markets to grow significantly in
2010 with China coming in at 9-10%, India in at 7-8%, Russia and
Brazil in the 5% range. This growth comes from government economic
stimulus as well as more spending by consumers and business.
In China, economists expect the country's "middle class" will
exceed the total population of the United States by 2015.
Overtaking the United States, more than 12.7 million cars and
trucks will be sold in China this year, up 44 percent from the
previous year and surpassing the 10.3 million forecast in the U.S.,
according to J.D. Power and Associates.
India's economy has produced a 250 million strong middle class
that is just beginning to consumer goods.
For investors, the expansion of the middle class in these
countries will spur demand for consumer goods and better food,
leading to more trade that encourages exports from the U.S. It also
will help multi-national companies that are aligned with these
growth waves to see stronger growth.
The commodity, industrial, and energy sectors should benefit as
they provide many of the products for the emerging countries.
Demand for technology products will increase, especially anything
to do with wireless communication.
This demand for commodities will help drive growth in Latin
America, especially Brazil, Argentina, and Chile. China has been
developing relationships with a number of Latin American countries
to help secure long-term access to commodities and agriculture
products. This will show up in better than average GDP growth for
several Latin American countries.
Finally, helping to drive the value of the emerging markets will
be the structural weakness of the developed countries due to their
large and growing debt problems. Investors will seek higher returns
by moving their capital to countries and companies that have better
long-term growth prospects.
Risks from Emerging Markets
As with any investment strategy, it is best to understand the
risks you face before making a commitment. That way you can develop
appropriate contingency plans and hedges should the risk become
reality. Investing in emerging markets involves four risks:
· Government Budgets become more difficult to fund. Should the
governments find it more difficult to fund their growing deficits,
interest rates will rise higher than many expect. As a result, it
will curtail any further economic growth. Action to take: Monitor
interest rates over time to see if they stay within expected levels
or suddenly rise. If rates rise, be prepared to reduce your
exposure to the emerging markets.
· China revalues the Renminbi ((
)). Should China revalue their currency, it will increase the cost
of their exports and lower the cost of their imports, assuming all
other prices remain the same. A higher price on China's exports
means all the goods imports from China to the US will cost more.
Action to take: Most likely any revaluation will be small, as China
does not want to risk hurting their export-oriented economy.
Monitor news reports relating this potential and be ready to reduce
your exposure to China should this become likely.
· Central Banks tighten credit earlier than many think. Should
the central banks tighten their credit sooner than many expect,
investors should expect the cost of money to rise more rapidly,
slowing growth. Action to take: The Federal Reserve is trying to
telegraph their actions in advance. Monitor their communications to
identify when and by how much they might tighten credit. Small
changes should be expected and will not cause a problem. If the
U.S. economy recovers faster and achieves higher growth rates than
many expect, the likelihood of tighter credit grows.
· U.S. economic recovery fades. If the U.S. economy slows or
does not achieve the expected 3.0% growth, meager as it is, it will
act as a break on the growth of the rest of the world, slowing
their growth as well. Action to take: Monitor growth of the U.S
economy, especially reported earnings. If earnings and revenue
growth do not achieve expectations, it is an early sign that growth
in the economy may be slowing. Also, monitor the jog picture. If
the economy is unable to generate positive job growth, it is
another sign that the recovery in the U.S. is floundering.
The Bottom Line
As a multi-year event, investing in the emerging markets offers
investors the best opportunities for 2010. Look to the ETFs that
concentrate in the emerging market countries mentioned as well as
companies that have substantial exposure to these countries.
Picking the Right Money Market ETF