Emerging markets equities offer investors myriad opportunities in the quest for growth stocks as people become better off and demand rockets for everything from tractors to toothpaste.
Several emerging markets companies are surfing the wave of infrastructure investment, including ICA, the largest construction company in Mexico. It reported strong sales numbers and has a full order book containing large infrastructure projects such as roads and refineries. Elsewhere, there are good prospects for Brazilian construction companies that are the beneficiaries of a government drive to build cheap apartments for low-income workers.
The march of the middle classes in Mexico is another trend worth exploiting. Drug companies are enjoying strong revenue and earnings growth amid increased demand for generic drugs, sexual potency treatments and personal care and cosmetics products from Mexico’s expanding consumer class.
Elsewhere, Magnit, a Russian retailer, is being boosted by the swelling Russian middle classes. The company is the second-largest retailer in Russia, yet it has less than 3% share in a fragmented market and has seen its sales grow sharply in 2010. Brazil is also witnessing dramatic economic and social change that is leading to a growing army of consumers.
In terms of the fourth structural driver of emerging markets, namely resources, there are strong reasons to remain underweight the materials sector and generally avoid commodity plays. One of the big macroeconomic problems occupying the thoughts of investors is the slowdown in the Chinese economy. However, the slowdown is relative: the Chinese economy will still probably grow at 8-9% even after recent measures to dampen growth.
More broadly, the macroeconomic outlook for emerging markets remains positive. Inflation rates are falling, interest rate rises have been postponed and substantial GDP growth is being recorded across most emerging market areas. With the developing world acting as the motor for the global economy and the confluence of the four forces of a burgeoning consumer class, export prowess, plentiful commodity reserves and an infrastructure boom, the long-term investment case for the emerging markets equities asset class continues to be compelling.