Investing in the Emerging Markets Consumer

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Consumers are driving growth in emerging markets, says Ed Kerschner, but investors buying the benchmark may miss out.

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Investing in the emerging markets consumer
Edward Kerschner, Chief Portfolio Strategist


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 cocalled 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.

The views expressed are as of October 2016, may change as market or other conditions change and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate.

International investing involves certain risks and volatility due to potential political, economic or currency instabilities and different financial and accounting standards. Risks are enhanced for emerging market issuers.

“It’s three billion new consumers.” Source: Ernst & Young, “Innovating for the next three billion”, 2011.

“The consumer sector that is attracting you…where the growth is the best.” Source: Kharas, “The Emerging Middle Class in Developing Countries,” OECD Development Center, January 2010.

MSCI Emerging Markets (EM) Index is designed to measure the equity market performance in global emerging markets.

S&P 500 Index is a broad-based measure of U.S. stock market performance.

Dow Jones Industrial Average is a price-weighted average of 30 significant stocks.

It is not possible to invest directly in an index.

Securities products offered through Columbia Management Investment Distributors, Inc., member FINRA. Advisory services provided by Columbia Management Investment Advisers, LLC.

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