How To Get The Most Out Of Emerging Markets

Capitalizing on the growth opportunity in emerging markets takes more than just an investment in the conventional benchmark index.

Emerging markets are an opportunity for growth-oriented investors — they are almost 40% of global GDP, and demographic trends suggest this will continue to grow. However, simply buying into the emerging market benchmark index provides little exposure to the largest growth opportunity. The big story in emerging markets today is the consumer sector. The rising affluence of more than three billion largely emerging market consumers is causing this sector to grow more rapidly than emerging markets as a whole. Emerging market benchmarks only have modest exposure to the consumer sector, accounting for about 15% of assets. In this video Ed Kerschner discusses how investors who are attracted to emerging markets can get the most out of their investment.

How To Get The Most Out Of Emerging Markets

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This current expansion in the global middle class, roughly three billion new consumers, is almost exclusively going to be coming from the emerging markets.

When you think about emerging markets, the big story’s really quite simple: it’s three billion new consumers. So if you think about investing in emerging markets, what’s drawing you there is the growth that’s coming from the new affluence that is developing in these developing markets. What’s happening to the emerging markets is the individual consumer in the emerging markets is hitting what is commonly called the sweet spot. There’s a point of income where you actually have something what’s called discretionary spending.

Now think about what that means as an investor. I want to invest in emerging markets because they’re growing rapidly. Their economies are growing rapidly. But what within those markets are growing more rapidly? It’s the consumer sector. So if I want exposure to emerging markets for growth — I do — then within the emerging markets, what I want exposure to is what is driving that growth, that is growing more rapidly than the overall emerging market economy, which is the consumer sector.

When investors think about investing in emerging markets, I think the initial thought is, “Well, I’m just going to go buy a basket of emerging markets.” Like, if I’m going to invest in the US, I’m going to buy the DOW Industrials or the S&P. So there is an equivalent index for the emerging markets. It’s what’s called a benchmark. It’s the entire market. Well, this co-called benchmark, the overall market, it really doesn’t have a lot of exposure to the consumer. It’s less than 15 percent consumer stocks. It’s got a lot of energy, got a lot of basic industry, it’s got a lot of industrials, it’s got a lot of everything else, but it doesn’t have a lot of the consumer.

So if you want to align your investment with your intent, what does that mean? If you want to buy what’s attracting you to emerging markets in the first place, then you probably don’t want to buy what’s called the benchmark or the entire emerging market. You want to buy that within the emerging market — the consumer sector — that is attracting you to the emerging markets, because that’s where the growth is the best.

Article by Edward Kerschner – Columbia Threadneedle Investments