Emerging Markets Middle Class Screams Investment Opportunity
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The global economy is changing rapidly and so is the investment world, offering many opportunities to shrewd investors. To see evidence of this change, investors have to look no further than the emergence of a middle class in the emerging economies.
Take a look at the raw numbers as compiled in a report titled Global Trends 2030 by the Institute for Security Studies (ISS). Based on current trends, the study says the middle class around the world will grow from about 2 billion today to 3.2 billion in 2020 and 4.9 billion (out of an 8 billion population) in 2030. Unlike today, there will be more middle class people than poor ones. The wealthy nations' share of the middle class population will shrink from 64 percent today to 30 percent in 2030.
Of course the definition of “middle class” does vary among economists although most agree on the definition as having between $10 and $100 a day in disposable income. Yes, that is a small amount but just think about all the people living on just $1 a day now around the world. This redistribution of economic wealth just screams investment opportunity.
The biggest change is occurring in Asia (no surprise). China already ranks second to the United States with 160 million middle class citizens, but that is still only 12 percent of their population. By 2030, the ISS estimates up to 74 percent of the Chinese populace could be middle class. In India, 50 percent of the population should cross the $10 barrier by 2025 and 90 percent will be middle class by 2040, according to the ISS.
The changes are not limited to Asia either. By 2030, Latin America is expected to have as many middle class consumers as North America. And in Latin America's biggest economy, Brazil, more than two-thirds of Brazilians will be middle class in 2030. Brazil is an interesting case for investors, so it warrants a closer look.
Most of investors' attention on Brazil has focused on the rise of the lower middle class. This population segment now accounts for more than half of all Brazilians and ballooned more than 60 percent between 2004 and 2011. This lower middle class earns roughly between $900 and $3900 a month per household. The number here is forecast to expand by another 12 percent by 2014.
But the area investors should focus some attention is on the part of the populace which earns above $4000 a month. Local economic analysts in Brazil say it is the segment of the population which will grow the fastest in the coming years. This middle class, which is more comparable to US standards, is forecast to more than double from the 2003 level by 2014 to more than 29 million people. That is nearly the size of Canada's middle class!
So how can US investors take advantage of the rise of the middle class in Brazil and other emerging markets? On a very broad basis, one could buy the iShares MSCI Emerging Markets Index ETF (NYSEMKT: EEM), but that ETF has only 15% exposure to consumer stocks and less than 30% in Brazil and China. Investors could even buy a country fund focused on China or Brazil, but you still may get little exposure to the gains being made by the middle class in those countries. There are better ways to gain exposure.
A better play may be to look for sector ETFs which focus on emerging markets consumers. Some examples include: Global X Brazil Consumer Fund (NYSEMKT: BRAQ), Global X China Consumer ETF (NYSEMKT: CHIQ), EGShares Emerging Markets Consumer ETF (NYSEMKT: ECON) and EGShares Consumer Goods GEMS ETF (NYSEMKT: GGEM). All of these ETFs have concentrated holdings in consumer-related companies.
More specifically, ECON has over 82 percent in consumer companies with nearly 20 percent of the portfolio devoted to Brazil, while GGEM has over 97 percent of its funds invested into consumer stocks with nearly a third of the fund invested in Brazil and China. A look at BRAQ shows that nearly 86 percent of the fund is invested in consumer-related companies while CHIQ has over 79 percent of the portfolio in consumer stocks.
The megatrend of the rising affluence of a middle class in the emerging economies is not one which looks to end any time. So it should prove lucrative to investors wise enough and patient enough to take advantage of the trend.
tdalmoe has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.