“Political instability and slow technological development can negate the positive effect of favorable demographics. Even the most aggressive investors should only buy equities after the country has suffered a severe market correction, like Asia in 1998.” - Harry S. Dent, Jr.

In the early stages of industrial development, demographics alone cannot be used to predict a country’s growth potential. The population of emerging countries grows rapidly, yet it tends to be concentrated in low age ranges due to high birth rates and lower life expectancy. Most of the population does not comprise a middle-class, either measured by income and spending or by the level of education and vocational skill. As a result, emerging countries don’t tend to follow the consumer spending and productivity cycles that we find in developed countries.

When we are evaluating the investment potential of an emerging country, two factors are more critical than demographics.

• The political system and political climate must be stable and moving towards a free-market system of commerce.
• The country must be building the communications, industrial and transportation infrastructure needed to participate in the global economy.

As we saw in the late 1990’s, the failure of a government or the failure of it’s chief financial institutions can wreak havoc in an emerging country, even when the demographic data is favorable. And the demographic data in Asia, Latin America and Africa is extremely favorable, far more than in North America or Europe.

In terms of demographics, the factors to look for, paradoxically, are falling birth rates and rising life expectancy. This indicates a shift in the age distribution away from a high percentage of young, unproductive people towards a productive, middle-aged consumer population.

Nevertheless, because of the political instability and market volatility of most emerging countries, we recommend them for the most aggressive investors only. Even if you have a high tolerance for risk, we recommend that you buy equities in emerging countries after a severe market correction, when their stocks are undervalued. This helps to minimize the downside risk of investing in an emerging economy. For example, we recommended investing in Asia in 1998 and investing in South America in early 1999.

Asia is the international region that HS Dent recommends now. It combines the most favorable demographics for long-term growth with the rapid development of an industrial and information infrastructure. The recent economic crisis has tended to accelerate the movement towards freer markets and more democratic governments, but the continued political and financial instability makes some countries very risky. Of these, HS Dent’s economic team favors Malaysia, Thailand and the Philippines.

Latin America is the most developed of the emerging regions and holds good potential for investment profit in the first decade of the 21^st century. Of these, we favor Mexico because of its proximity to the U.S. and its membership in NAFTA. we also recommend Chile, Argentine and Brazil because of a combination of favorable demographics and industrialization.

We don’t generally favor the Middle East simply because of the volatile politics. However, Israel has the technological skills and information infrastructure to compete effectively in world markets. Our research also doesn’t favor the emerging countries in Africa for the same reason, although Africa has an additional challenge. The geography of the area is not favorable to internal trade and communication and it has tended to isolate Africa from the rest of the world. As a result, the development of information technology and other infrastructure to support commerce is highly critical.

To conclude, while emerging countries offer the investor great upside potential, they are volatile, high-risk choices. If that doesn’t suit your risk profile, a safer way to take advantage of the massive growth potential of emerging countries is through multinational equities and funds .