How to follow the ‘American Roadmap’ with emerging market investing…
By Kim Iskyan
Not long from now, the entire notion of “emerging markets” will go the way of telephone landlines and gasoline-powered cars. Soon, so-called “emerging” markets will be bigger than those that have (supposedly) been granted “developed” status.
Already, China’s stock markets are worth more than those of France, Germany, and Switzerland – combined.
As the Mexicos, Indias, and Bangladeshes of the world (to say nothing of China) steadily close the gap with the U.S., Japan, and EU – the shift will redefine the global economy.
And if you want to make big gains in the market, you need to invest in growth.
Just consider the gains you could have made during the U.S. consumer boom in the 1950s. From 1950 to 2015, U.S. GDP per capita rose 690%, adjusted for inflation. During that time, the S&P 500 Index soared 11,700% (and that’s not including reinvested dividends).
Over the course of this boom, a handful of individual stocks turned many regular investors into millionaires…
• $1,000 invested in Standard Oil (Exxon) in 1950 would have become $2.4 million by 2016.
• $1,000 invested in tobacco giant Philip Morris in 1957 would have become $5.5 million by 2007.
• $1,000 invested in Coca-Cola stock back in 1962 would have been worth $221,445 by 2016.
• $1,000 invested in McDonald’s in 1965 would have become $4.1 million by 2016.
That’s the power of investing in growth – early on.
But looking forward, the growth isn’t going to be in the U.S.
And this shift will create big investment opportunities…
In 1995, the “Emerging 7” countries – China, India, Brazil, Russia, Indonesia, Mexico, and Turkey – totaled just half the size of “the Group of 7 developed countries – the U.S., Japan, Germany, United Kingdom, France, Italy, and Canada – based on GDP at purchasing power parity (PPP), which adjusts for differences in the cost of living between countries.
But this is changing, as the figure below shows.
In 2016, the economies of the E7 countries were, combined, larger than the economies of the G7 countries. And by 2040, professional services firm PricewaterhouseCoopers (PwC) expects that the E7’s economies could be double the size of those of the G7.
That means that by 2050, E7 countries will make up almost 50% of the global GDP (based on PPP), while G7 countries will only make up around 20%. For comparison, G7 countries currently make up 31% of global GDP… while E7 countries make up 37%.
China and India will make up most of the world’s GDP – with China’s share growing from almost 18% today to 21% by 2050. Meanwhile, India’s share will grow from 7% today to 15% by 2050.
If you want to make big gains in the market, you need to invest in growth.
During this time, the U.S. (which in 1990 accounted for 21% of global GDP) will fall from today’s 16% to below 12% in 2050. And the European Union will fall from 15% to 9% over the same period.
In this shift, Brazil and Mexico are expected to overtake Japan and Germany to become the fifth- and seventh-largest economies. Meanwhile, India will overtake the U.S. to become the second-largest economy.
The chart below shows how a list of the world’s top 10 economies will change by 2050…
To put it simply, this shift is taking place because E7 economies are growing faster than G7 economies. A lot faster.
PwC expects E7 countries’ GDPs to grow at an average annual rate of 3.5% between 2016 and 2050 (and some emerging markets will grow much faster than that).
Meanwhile, G7 GDPs are only expected to grow at an average annual rate of just 1.6% from 2016 to 2050.
So where is all this growth – in emerging economies in particular – coming from?
Economic growth comes from two sources: population growth and productivity growth. (Broadly speaking, economic growth is a function of the number of workers in an economy, and their productivity.)
Shifting demographics, in part, drives economic growth… It’s responsible for a growing workforce. And while population growth is falling in many major economies in Europe, and is negative in places like China and Japan (reducing the labor pool and damaging productivity over the long term) it is expected to rise in many other parts of the world.
For example, Africa will see the highest population growth. But countries in Southeast Asia also have good reason to be optimistic… and changing demographics in this region will likely boost economic growth over the next several decades.
For economies, productivity is often measured as the percent increase in GDP per capita – that is, the total economic output per person. This can come from people working more efficiently, like through technological innovation. Higher productivity means a growing economy.
As you can see in the chart below, annual GDP per capita growth is expected to be more than 3% in many emerging markets from 2016 to 2050. Meanwhile, countries like the U.S., U.K., and Japan will experience annual economic growth of 1.5% or less.
To profit, first you need to invest, and an easy way to do that is by buying a broad emerging markets fund like the iShares MSCI Emerging Markets Fund (NYSE: EEM). EEM tracks an index of emerging-market firms weighted by their market cap.
But if you want to make outsized returns, one of the best ways is by investing in China. As I said earlier, China’s share of the world’s GDP is growing every year. And right now, the country is experiencing a massive middle-class boom… By 2020, there will be over 550 million middle-class people. That means a lot of money is about to flow into Chinese companies.
And there are three other fast-growing markets that likely aren’t on your radar… Vietnam, Bangladesh, and India.
According to a recent PwC report, these three markets could be the fastest-growing economies through 2050 – averaging real economic growth of around 5% a year.
Thanks to this growth, India is expected to be the second-largest economy in the world by 2050 – eclipsing the U.S., and behind only behind China (which will inevitably see its growth decline from its current level). Vietnam is forecasted to move from the 32nd-largest economy to the 20th-largest. And Bangladesh could move from the 31st-largest economy to the 23rd-largest.
Again, the easiest way to invest in each of these countries is through exchange-traded funds (ETFs).
There are three other fast-growing markets that likely aren’t on your radar… Vietnam, Bangladesh, and India.
For Bangladesh, there’s the MSCI Bangladesh IM Index UCITS Fund (London: XBAN). This fund tracks the performance of the MSCI Bangladesh Investable Market Total Return Net Index, which is designed to reflect the performance of a broad range of companies in Bangladesh.
For India, one ETF is the iShares MSCI India Fund (NYSE: INDA). This fund tracks the MSCI India Index, which measures the performance of companies whose market capitalizations represent the top 85% of the Indian equities market.
In Vietnam, some ETFs badly underperform their benchmark index (known as tracking error). This is a particular problem here because the government (through state-owned enterprises) owns most of the shares in many publicly-traded companies. This makes shares of those companies very illiquid (they don’t trade much) and very volatile. That makes it very difficult for fund managers to accurately replicate the performance of the index.
Instead, consider the Vietnam Enterprise Investments Limited (VEIL), a London-listed closed-end fund. Launched in 1995, VEIL invests in listed companies (and up to 15% of capital in pre-IPO companies) in Vietnam with a small allocation to neighboring Laos and Cambodia. Its performance has been solidly in line with the Vietnam market index and a lot better than that of the big ETFs that focus on Vietnam.
Whatever you do, don’t miss out on the most lucrative investment opportunities of the next 25 years.
Kim Iskyan is the publisher of Stansberry Churchouse Research, an independent investment research company based in Singapore and Hong Kong that delivers investment insight on Asia and around the world.
Kim has nearly 25 years of experience as a stock analyst, hedge fund manager, political risk consultant, and financial commentator in more than half a dozen emerging and frontier markets.
You can find more of Kim’s experience in Asia Wealth Investment Daily letter. It’s a must-read if you are at all interested in the explosive growth of the Chinese middle class. (Legendary investor Jim Rogers reads it every day.) And if you’re interested in specific recommendations on how to invest in emerging markets… click here to learn how to follow the “American Roadmap” with your emerging market investing.
