Economic forecasting is a precarious business. Yet it is important to have a thoughtful perspective on economic growth if you hope to be a successful investor. The emerging markets, especially Asia are important drivers of economic growth for companies that can take advantage of the opportunities.
In the emerging markets, the economic trends of 2010 will continue through 2011 with slight moderation. China will slow slightly as the steps undertaken by the government to temper the torrid growth have some affect. India will grow slightly faster in 2011 as the economy benefits from the acceleration of domestic spending, a relatively strong currency and a supportive macro-economic policy.
QE2 Affects Emerging Markets
In addition, the Federal Reserve's second round of quantitative easing will see much of the money arrive in foreign hands, especially the emerging markets. Investors will use this extra money to invest where they believe rates of return are higher, i.e. emerging markets. This money will tend to inflate the emerging markets economies even as they attempt to control rising prices.
If the Fed proceeded as planed and ends their purchase of Treasury bonds in June, it will act as a break on inflation in these countries as well. This could encourage renewed growth in their economies, as the central banks will not have to step in to limit monetary expansion further.
Using The Conference Board data China's DGP will expand at a 9.6% rate vs. 10% in 2010, while India will see their GDP expand at an 8.4% rate up from 7.5% in 2010. The Chinese government is trying to control inflation as they increase reserves banks hold. Part of this move is in response to the Federal Reserve's second round of quantitative easing.
Other parts of Asia, especially Southeast Asia (Indonesia, Vietnam, Hong Kong, Taiwan and Thailand) will see their GDP grow by 5.2% down from 6.0% in 2010.
Much of this expansion in GDP comes from their growing manufacturing capability and expanding domestic market. For example, some economists estimate that between 2010 and 2014 more than 230 million households in emerging markets will buy their first PC. As a reference, there are approximately 115 million households in the United States.
In Latin America, growth will slow from 5.7% in 2010 to 4.0% in 2011. The Middle East and Africa will see faster GDP growth reaching 5.1% up from 4.4% for the Middle East and 4.1% for Africa in 2010.
Catch Domestic Growth
In each of these countries, more people are entering the middle class driving demand for consumer goods and better food. For example, Brazilians bought 4.5 million cars in 2009, twice what they purchased in 2003. The Chinese bought more cars in 2010 than sold in the United States. The upper class will expand as well creating more demand for higher end goods.
Consumers in the emerging markets will buy more staples and discretionary items that are popular in the rest of the world. Companies positioned to take advantage of this growth will see their revenues expand as sales pick up. Starbucks (SBUX), Coach (COH) and Deckers (DECK) are interesting examples.
Technology companies like Apple (APPL), Hewlett Packard (HP) and Dell could see new sales opportunities as consumers in the emerging markets acquire access to the internet through personal computers and portable devices.
In addition, consumers will buy more meat and higher quality food items that are more expensive. To grow more food farmers need fertilizer. Fertilizer uses potash as an important ingredient. The potash mining companies Potash (POT), Mosaic (MOS), and Agrium (AGU) offer good long-term growth as well. Farm equipment companies like Deere (DE) and Case IH (CNH) will see growing orders for farm equipment that increases the productivity of farmers globally.
Consumer staples companies Proctor & Gamble (PG), Unilever (NV) and Colgate will see higher rates of growth for their products. For example, in China the toothpaste category has grown 60% over the past three years. Uniliver is experiencing growth in Asia and Latin America in the 8 to 10% range in 2010, down from 15 to 16% in 2009. Moreover, it looks like the growth rate is turning back up.
The Bottom Line
For 2010, investors will benefit from companies that receive more than half of their sales from emerging market countries. This includes companies based in the United States and Europe.
The consumer discretionary and staples sectors will benefit from the growth of the emerging markets throughout 2011. In addition, the technology sector will be another benefactor. Finally, companies that help farmers to grow more food will participate in the strong growth in the emerging markets.
The emerging markets are transitioning from low cost manufacturing centers to economies with a stronger consumer base. This process will last for at least a decade.