Bare Necessities…Big Opportunities

Story Highlights:

• Emerging Markets growth is a headline story of the current global equities bull market.
• While many investors focus on industrial goods and exports from developing lands, big opportunities for consumption growth abound as millions of world citizens join the middle class.
• Goods regularly considered "slow growth staples" in developed countries are seeing big demand in emerging regions.

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We forget how good we've got it. Around here, we worry about whether flat panel TV growth was 20% or 18%, or how uber-luxury autos sales are doing:

Bentley Sales Reflect Downturn
Christine Buckley, The Australian

Sheesh. Seems like we've lost the forest for the trees. Evidently Bentleys aren't selling as well as they used to. Bummer.

None of this is to make you feel guilty about your new 50" plasma, or the Super Bowl party you threw to christen it. That we employ our capital as we see fit on goods and services is a major growth driver for other regions and plays a big role in global prosperity.

All those goodies we're buying put money in the hands of those who made them. This means massive infrastructure build-outs, higher raw materials demand, increased productivity, and so on, for developing countries. This is no surprise, and no secret.

But there's a flipside. As per capita income grows, Emerging Markets citizens want to better themselves economically—they want higher standards of living. This doesn't just come from infrastructure. It also takes the form of increased consumer spending.

Now, more than ever, Emerging Markets are demanding more goods, not just supplying more. The most high profile examples are India and China, but economic expansion in Emerging Markets is happening across regions.

Instead of thinking of developing countries as mere exporters, it's time to start thinking about them as demanders too. Middle and lower class Emerging Markets folks got some money in their pockets, and they want to buy stuff just like us.

This makes for a unique investing opportunity.

In developed countries like the US, the largest growth in personal consumption comes from electronics, leisure and gaming, and so on. We call these things "Consumer Discretionaries" because they're what we spend our discretionary income on. They're not bare essentials, but a part of our lifestyle. Items like toothpaste, light bulbs, and gasoline are essential, everyday goods and tend to grow more slowly, mirroring the broader economy. Such items have relatively inelastic demand (people buy them in good times and bad), and are called "Consumer Staples."

But it doesn't necessarily work that way for consumption growth in a developing country. A new and burgeoning middle class will see big growth in Consumer Staples as folks habituate to, and buy more of, the stuff we consider obligatory.

Many multinational companies, seeing middling expansion in their usual developed territories, are looking to get in on Emerging Markets' demand growth, aggressively expanding into new regions. It's a good strategy that's paid off in spades so far. We've seen plenty of surpassed earnings expectations in recent quarters on the wings of big sales growth in Emerging Markets.

For investors desiring Emerging Markets portfolio exposure, it's good to look for opportunities tied to growing demand for goods, not just supply. The bare necessities are a big opportunity in today's fledging economies.