I read in the Financial Times today that Israel is to be officially upgraded from “emerging market” to “developed market” by Morgan Stanley Capital International (”MSCI”), the creator of the popular index that the EEM exchange-traded fund is based on (see “Israel Set for Bumpy Ride to the Top“).

Well, it’s about time.    Israel has had a standard of living comparable to Western Europe for years.  The country has world-class high technology companies and some of the world’s best scientists.   The same can be said for Taiwan and South Korea, two of the largest countries by weighting in the EEM.

This is not a personal gripe; it’s a portfolio management problem.  When investors want exposure to “emerging markets,” they’re not getting it when they benchmark to the standard emerging market indexes.  They are getting only minimal exposure to up-and-coming countries like Brazil, China, and India.  Instead, they are getting oversized exposure to countries like Israel, South Korea, and Taiwan — countries whose high-growth emerging phase has largely passed.

This is not to say that Israel, South Korea, or Taiwan are bad investments.  All three have fine, world-class companies.  But if you want real exposure to emerging markets, you might have to look beyond the popular mutual funds and ETFs and dig a little deeper.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

Stratfor reported some statistics for China that should be disturbing.

China’s National Bureau of Statistics released on Feb. 2 details about economic growth for 2009, including the components of the year’s 8.7 percent growth rate. Growth is broken down into investment, consumption and net exports. Of these categories, investment contributed 8 percentage points, or 92 percent, of overall growth.

Meanwhile, consumption contributed a comparatively measly 4.6%, while net actually exports subtracted 3.9%. So,virtually all of China’s growth is based on stimulus / investment.  Without this capital spending splurge, China’s growth rate would have been a paltry 0.7%.

Given this, it would hardly seem that China would be the engine to pull the world economy out of the doldrums.   This is a development we intend to keep an eye on in the months ahead.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

At HS Dent, we are generally quite bullish about the long-term prospects for India.  With a large population, a growing middle class, a developing consumer economy, and a tech-savvy workforce, India has a lot going for it.

Unfortunately, the country also has a history of getting in its own way.  For example, in today’s Financial Times, we read this little tidbit that will make you want to pull your hair out:

Indian authorities have sealed off about 300 mobile phone towers in a New Delhi suburb, after ruling that a decades-long ban on commercial activities in residential areas was being violated.

Telecom industry insiders said mobile phone services in Noida, a busy residential and industrial area near New Delhi, had been hampered by the move to put out of action nearly a third of the area’s 1,000 mobile phone towers, most of which have been in place for years.

The impact on consumers is huge — mobile penetration in the country far exceeds landline availability, even in urban areas.

Well, that’s just brilliant.  In an era in which fast communication is everything, send your citizens back to the Stone Age by cutting off their access to mobile phone towers — all in the name of enforcing what amounts to an insignificant municipal regulation. Read the rest of this entry »

We’ve made it clear in our past writings that we do not believe that the emerging market consumer will be able to replace the lost buying power of the American and European baby boomers.  That said, we do believe that the emerging market consumer will be a bright spot in the years ahead in a global economy that desperately needs one.

“The emerging market consumer has much more of his life in front of him…and they have an amazing optimism about the future,” Jenny Wiggins quotes Bharat Puri, global chocolate category director at Cadbury, in her recent Financial Times article (see “Growing Taste for Quality Goods.”)  There is a lot of truth to this, and in fact it summarizes a lot of what we’ve said here at HS Dent.  Emerging market countries have younger populations, and large segments of their populations have real disposable income for the first time.

Along these lines, one Financial Times headline really caught our attention: “Business of beauty is turning heads in Brazil.”  A few years ago, when we were young, single, and backpacking our way through Brazil, the beauty of Brazilian women did not escape our attention.  So after reading the FT article above, we were not at all surprised to read that Brazil is the world’s third largest market for cosmetics (after the U.S. and Japan) and the second largest market for plastic surgery.  Read the rest of this entry »

Once in a while you come across an article that you wish you had written yourself, an article that completely summarizes everything you were thinking on the subject and makes you say “me too.”

Peter Tasker published that article this morning in the Financial Times: “Beware the Lure of GDP When Seeking Stocks in Brics.”

Investors have been pulling their money out of developed markets like the United States and Europe and aggressively plowing it into emerging market stocks and mutual funds.  The consensus view is that emerging market economies are growing–growing quite quickly, in fact–while developed economies are not.  So why not participate in that growth by allocating a large slice of your portfolio to emerging markets?

As you might imagine, Mr. Tasker has a few reasons to think twice: Read the rest of this entry »

 We like “big picture” analysis here at HS Dent.  It’s very easy to get wrapped up in the noise of economic press releases and stock market prognostications and lose sight of the major themes that will shape the world in the decades ahead—and no theme is more important than demographic trends.

We were delighted to see Jack Goldstone write an article on demographics in the latest issue of Foreign Affairs: “The New Population Bomb” (Registration may be required to view entire article)

Goldstone outlines the major demographic shifts afoot–the aging of the developed world, the urbanization of the emerging market countries, and the relative shifts in population and economic clout between developed and developing world.  All of these are themes that HS Dent follows. Goldstone also arrives at many of the same conclusions as HS Dent.  The effects of these demographic changes will, Goldstone writes, “have a dramatic impact on economic growth, health care, and military strength in the developed world. The forces that fueled economic growth in industrialized countries during the second half of the twentieth century — increased productivity due to better education, the movement of women into the labor force, and innovations in technology — will all likely weaken in the coming decades.”

Goldstone continues,

College enrollment boomed after World War II, a trend that is not likely to recur in the twenty-first century; the extensive movement of women into the labor force also was a one-time social change; and the technological change of the time resulted from innovators who created new products and leading-edge consumers who were willing to try them out — two groups that are thinning out as the industrialized world’s population ages [This is consistent with HS Dent’s research into S-curves and market penetration - CLS]

Alas, there is more bad news:

Moreover, developed countries will be lucky to keep productivity growth at even that level; in many developed countries, productivity is more likely to decline as the population ages…. All this means that just as aging developed countries will have proportionally fewer workers, innovators, and consumerist young households, a large portion of those countries’ remaining economic growth will have to be diverted to pay for the medical bills and pensions of their growing elderly populations. Basic services, meanwhile, will be increasingly costly because fewer young workers will be available for strenuous and labor-intensive jobs. Unfortunately, policymakers seldom reckon with these potentially disruptive effects of otherwise welcome developments, such as higher life expectancy.

Goldstone has a good grasp of the demographic issues.  There are significant challenges in the years ahead, but there are also incredible opportunities.  The problem in the developed world (particularly parts of Europe and Japan) is that with a an aging and shrinking population, there is less aggregate demand.  Who, exactly, are you going to sell your products to when every year there are fewer people alive and able to buy?  Who are you going to sell your house to?

This has never happened in the industrial and post-industrial eras.  Never.  It is truly unprecedented.

But, within the shrinking pie, if you can figure out a way to gain a bigger piece of the pie, there are opportunities.  In Japan, for example, the robotics industry is booming.  Robot labor is partially filling a gap left by the aging and depopulation of the country.

The opportunities are out there.  You just have to look for them.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

“After Dubai, will Greece be next?” asks the Financial Times this morning.  They are speaking of sovereign default, of course.  The debt payment moratorium by Dubai World has investors asking these kinds of questions for the first time in nearly a year.

In late 2008, the question was “which bank is next?”  Today, the question is “which sovereign state?”  Might it be one of the usual suspects?  Perhaps Russia, Turkey, or one of the South American republics?  Or might it be someone new and exciting — like another Iceland!

Interestingly, one country is conspicuously off the list of candidates: the United States.  Yes, it appears that investors like to talk good game about dumping US dollars in favor of “safe” havens like gold (for our views on the barbarous relic, see here).  Yet somehow, when the world suddenly looks risky again, it is not gold that offers protection (gold fell sharply on the Dubai news, in fact).  It is the US dollar and US government debt that investors run to.

These are certainly interesting times.  We’ll refrain from attempting to call the exact top on the gold bubble.  We already tried that on the euro (see here), and thus far we’ve been wrong, or at least “early” on that call.

We continue to advise caution on both the euro and gold.  There is absolutely nothing wrong with attempting to earn a quick speculative buck on either, so long as you understand the risk being taken.  But both would appear to be very highly vulnerable, and their current bull markets are based on very questionable assumptions about the US dollar.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

 We have an ongoing commentary on India, a country with almost unlimited potential but also with a LOT of problems that have to be resolved first.  Among emerging markets, we are attracted to India primarily for:

1. Its sheer size
2. Its orientation towards domestic consumption vs. exports (this makes the country less susceptible to contagion from global economic crises and weak demand from Western importing countries)
3. The country’s youth — with such a young population, Indian aggregate demand will only grow.

But, as we said, India is not without its problems, which include vast rural poverty and illiteracy, an antiquated caste system that still seems to linger on into the modern age, stifling governmental bureaucracy, a vast educational and wealth divide between the “haves” and “have nots,” and — the focus of this post — truly horrid infrastructure.  

The odd thing is, most of these complaints, including that of poor infrastructure, have been heard since the early days of the British colonial period! Read the rest of this entry »

With stocks — and particularly emerging market stocks — now in a solid, multi-month uptrend, talk of “decoupling” is beginning to be whispered again.  Long dependent on exports to the West, emerging giants such as China and India will instead go a new direction, trading amongst themselves.   This  sounded great in theory — until the subprime crisis in the United States spread around the world.   Read the rest of this entry »