Published November 30, 2012
The investment thesis behind the emerging markets consumer theme has arguably proven to be a dichotomy. Foreign investors grasp the concept of increasing wages, rising middle classes and the benefits those factors can have for a developing economy.
Conversely, it has been the methods by which investors choose to tap into emerging markets consumers that have proven vexing. On the surface, Western companies with stellar brand recognition such as Coca-Cola (KO) and McDonald's (MCD) would appear to be fine ways to play consumers in the developing world. The reality is those companies and others like them have massive top lines and emerging markets still only represent a fraction of their revenue.
That is to say, investors are best served by focusing on stocks and ETFs that offer exposure to local brands. Some fresh statistics reiterate as much.
"Consumer spending will grow faster in Asia's rapid growth markets than in advanced economies. Our forecasts suggest that Asia-Pacific rapid growth markets will see their share of global consumption rise from under 14% in 2010 to almost 25% by 2020," according to an Ernst & Young report on the emerging markets consumer.
That forecast is not surprising. Earlier this year, Boston Consulting estimated Chinese and Indian consumers will spend a combined $64 trillion in the years leading up to 2020.
There are some direct ETF plays on that theme such as the First Trust ISE Chindia Index Fund (FNI) which offers a sizable allocation to discretionary names. Of course, the Global X China Consumer ETF (CHIQ) and the EGShares India Consumer ETF (INCO) are direct plays on the consumers of those countries, but there is more to the story.
"In rapid growth markets, markets for many consumer goods are reaching takeoff points,' where rising per capita income generates a more-than-proportionate increase in market size. Demand for consumer durables is set to boom," said Ernst & Young.
Additionally, Ernst & Young sees a strong increase in exported goods and services in the Pacific Rim over the next decade. That increase will be driven, in part, by booming domestic demand. The domestic demand story in the developing world reminds investors multinationals are not always the best way to tap into the emerging markets consumer.
An alternative avenue is the newly minted EGShares Emerging Markets Domestic Demand ETF (EMDD). The EGShares Emerging Markets Domestic Demand ETF, which debuted in July, was created to offer investors a better way of exploiting the domestic demand story in the emerging world. U.S. multinationals such as Coca-Cola and McDonald's are not found in this fund.
However, EMDD does offer a direct avenue to the expected vibrancy of Asia's local demand story over the coming years. India and China combine for over 30 percent of the fund's weight. EMDD also features smaller allocations to Indonesia, Malaysia, Thailand and the Philippines.
For more on the emerging markets consumer, click here.
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