Why the Real Emerging Markets Boom Has Only Just Begun
The explosive growth potential of emerging markets is not mainstream news…yet.
We are still in what people will one day look back on as the “calm before the emerging markets storm.” A time when investors can still buy emerging markets growth at relatively cheap valuations. A time before the full force of the emerging markets bull market is felt.
To say it’s an exciting time for investors is an understatement. The emerging markets are about to take off on a rocket ride that could span a decade…and even more.
There are many reasons why the next decade belongs to the world’s emerging economies. Places like China, India and Brazil. But also places like Singapore, Colombia, Peru, Turkey, Vietnam, South Africa and Indonesia.
Demographics…supercharged growth rates…and low levels of sovereign debt all favor these economies over what I call the “submerging economies” of the U.S., Europe and Japan.
But there are two critical trends setting up right now that mean whatever boom we’ve seen in the emerging markets is just a shadow of what’s to come…
These Two Monetary Forces Will Push Emerging Markets Even Higher
1) Currency tensions – It’s no secret that the world’s most powerful central banks are engaged in a competitive race to the bottom. The most aggressive player in this currency war is the U.S. Federal Reserve. With interest rates near zero and Bernanke signaling more “quantitative easing” (i.e. money printing), the U.S. dollar has lost 8% versus other major currencies since September.
The zero returns for holding dollars is leaving investors with little choice but to buy anything that is in emerging markets. (Low rates and a falling dollar feed into a rush into high yielding assets.) I’m not talking about mom-and-pop investors here. I’m talking about big multibillion-dollar institutions.
As Michael Power, global strategist at Investec Asset Management, told Reuters recently: “It used to be ‘Growth At the Right Price’. Now it’s almost ‘Growth At Any Price’. We’re moving from emerging markets as an option to a permanent feature in asset allocation portfolio.”
2) The rise in consumer credit – This phenomenon is only getting started. But there are a number of very positive signs that emerging market consumers are finally starting to get access to credit.
The Wall Street Journal reports that there was a 17.1% rise in Chinese credit card balances in 2009. Over the same period Brazilians increased their credit card balances by 28.9%. And Latin America as a whole saw an increase of 9.2%. This is at a time when Americans decreased their balances by 8.7%.
This boost in credit does a very important thing: it puts more money in the hands of emerging market consumers. Traditionally, emerging markets have depended on exporting to U.S., European and Japanese consumers. Now, emerging market consumers are taking on more of the buying burden.
Eventually, too much credit in the hands of emerging markets consumers could have the same effect it’s had on U.S. consumers: a big meltdown in credit and a painful de-leveraging. But that’s a long way off. In the meantime, rising credit card balances will drive consumer spending higher in the emerging world and give a big boost to corporate profits…and economic growth…there.
Investors who understand the effects of these two trends will stand to benefit big time. Make no mistake: The great emerging markets boom has only just begun. It’s time to start exploring the opportunities these markets have to offer and allocating a portion of your portfolio to emerging markets growth.
Article originally appeared on International Living