A new phase of growth yields a new crop of opportunities

The shift towards domestic opportunities means there is less reliance on global economic growth to stimulate emerging economies. Growth in the developed world has slowed to an annual pace of 2%-2.5%, while it’s more than double that in the emerging economies at 5%-5.5%, Langham says.

In addition to superior growth, many emerging countries have moved in recent years to elect pro-business political parties that are instituting reforms and reshaping policies to address bottlenecks, eliminate outdated subsidy arrangements, sell off incompetent state-owned enterprises and improve infrastructure.

“New governments in places such as China, India and Indonesia are improving the bureaucratic process, allowing projects to go forward instead of stalling them,” Langham says. “New leadership in China, for example, has aggressive plans to reduce corruption and increase the participation of the private sector in the economy through the privatization of state-owned enterprises, leading to greater efficiency and profitability.”

By 2020, U.S.-based Morgan Stanley & Co. Ltd. forecasts India’s gross domestic product (GDP) will cross the US$6-trillion mark while China’s will surpass US$20-trillion. The firm expects the two economies to be the dominant global growth stories for the next 20 years.

The Brookings Institution, a U.S.-based consulting firm, forecasts the number of middle class people will grow to 1.7 billion in the Asia Pacific region by 2020, much bigger than the forecast 333 million in North America.

“Emerging markets have positive demographics, with young populations that are moving into their most productive years,” says Singapore-based Mark Mobius, executive chairman of Templeton Emerging Markets Group, a division of U.S.-based Franklin Templeton Investments Corp. “The evolution happens in steps. In the early stages, the population serves the labour requirements of the manufacturing industry, and then there is a shift to greater domestic consumption as incomes go up.”

The first item of purchase as personal incomes grow is usually a smartphone, he says, followed by bigger ticket items like motorcycles, cars and ultimately homes, furniture and appliances. Mobius says cell phones are the leading consumer good sold in the world, and of the 1 billion sold last year, 68% were sold in emerging markets.

Consumption also leads to demand for mortgages, which stimulates the banking industry.

Christine Tan, portfolio manager at Excel Funds Management Inc. of Mississauga and manager of Excel Emerging Markets Fund, says the burgeoning diversity of investment opportunities is reducing cyclicality of the boom/bust cycle in emerging economies and creating more stability. She cites the emergence of dominant global players that are based in emerging markets and can now compete with established U.S. and European brands.

For example, Great Wall Motor Co. Ltd., a Chinese manufacturer of cars, sport utility vehicles and small trucks, is growing rapidly but still sells at a discount to the top global giants in car manufacturing, she says. She also cites WH Group Ltd. of Hong Kong, the largest pork producer in the world, which recently bought Smithfield Foods Inc., the U.S.’s largest .

In addition, Korean brands such as Samsung Electronics Co. Ltd., LG Chem Ltd., Hyundai Motor Co. and KIA Motors Corp. have become household names around the world.

Interregional trade is growing rapidly among emerging economies and this is further stimulating growth, says Mobius. Countries such as Malaysia, Vietnam, Thailand and Indonesia are exporting raw materials, agricultural products such as rice and palm oil, and semi-finished goods to China, he says. Items such as electronic parts are made in Thailand or Vietnam, and are shipped to countries like Taiwan and Korea, where finished goods such as smart phones and televisions are produced.

“Emerging countries are less reliant on the U.S. and Europe, and trade more with each other,” Tan says. “They manufacture domestically, and import from some surrounding countries and export to others.”

Upward mobility is also stimulating the travel industry in emerging markets. The gambling resort of Macau now produces seven times the revenue of Las Vegas, and the Chinese are now the biggest contributors to global tourism, Tan says. This has lead to opportunities in companies like Ctrip.com International Ltd., a Chinese-based online travel agency with a commanding market share.

Education is another growth area in emerging countries, and Tan likes TAL Education Group of China, a leading provider of tutoring services, and Kroton Educacional SA, a Brazilian company providing private primary and secondary education.

Tan’s largest geographic holdings in Excel Emerging Markets Fund are in China, South Korea and India, which account for half of the fund. Her top sector weights include financial services, information technology, industrials and manufacturing and pharmaceuticals and health care.

The largest regional representation in Templeton Emerging Markets Fund is China, followed by Brazil, and on a sector basis, consumer staples and financials are the top contributors.

This is the first article in a three-part series on investing in emerging markets.

Next: Accelerating growth in India.