Investing in the Emerging-Market Consumer

Opportunity awaits consumer companies in emerging markets, but infrastructure and financing hurdles require long-term perspective

R.J. Hottovy, CFA 20 November, 2012 | 6:00AM
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With much of the eurozone mired in a recession and the recovery in the United States progressing at an almost glacial pace, it's not surprising that investors are increasingly turning to emerging markets to augment portfolio returns. It's easy to understand the appeal--emerging markets tend to have young and growing populations, and they now find themselves with an increasing amount of disposable income. By 2020, the number of middle-class consumers in emerging markets may be larger than middle-class consumers in the US and Europe combined. However, investing directly in the stocks of emerging-market consumer companies may not be the most prudent strategy to capitalise on these growth opportunities, as infrastructure investments that are needed to remain competitive with multinational behemoths may prevent these firms from realising positive economic returns for an extended period.

Instead, Morningstar believes that investing in consumer companies with established economic moats (aka structural competitive advantages) is the most effective way to participate in the tremendous growth potential of emerging-market consumers, as these companies do not face the same infrastructure burdens as their emerging-market brethren, have easier access to capital, and are not reliant on a single emerging-market economy to generate excess economic returns. These companies are better positioned to compete for share in some of the highest-growth markets in the world.

Growth Potential of Emerging-Market Consumers Is Undeniable
Euromonitor forecasts that emerging markets will account for nearly three fourths of the world's urban population by 2015, and that the consuming class (representing consumers with more than $5,000 in disposable income) in these regions will add about 1 billion individuals in the next 10 years. A large proportion of the growth in the global consuming class will come from India and China, which are expected to add 200 million and 400 million individuals by 2020, respectively. However, over the next several years, we also expect an increasing contribution from Eastern Europe (Russia), Latin America (Brazil), Africa (primarily South Africa, but also Kenya and Nigeria), and several other Asian nations (South Korea, Indonesia, Vietnam, and Malaysia).

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Coca-Cola Co54.45 USD0.18Rating
Coca-Cola Femsa SAB de CV ADR54.10 USD0.76Rating
Diageo PLC3,639.50 GBX0.92Rating
Future Enterprises Ltd8.97 INR-1.75
Hindustan Unilever Ltd2,455.05 INR0.38
McDonald's Corp238.44 USD-1.23Rating
Reliance Industries Ltd ADR71.90 USD2.71
VF Corp70.74 USD-4.50Rating
Yum Brands Inc126.57 USD-0.17Rating

About Author

R.J. Hottovy, CFA  is a director of equity analysis with Morningstar.