Developing countries, which are also referred to as emerging markets, are rapidly becoming the drivers of global economic growth. A lot of people talk about investing in developing countries, but why should this be considered? According to Israel Figa, investing in developing countries now is the best move because it allows people to cash in where the growth is currently happening and will continue to do so in the foreseeable future. As per the estimates of the International Monetary Fund, developing economies are expected to grow two to three times faster than developed countries, such as the United States.
This growth narrative should be understood by all investors, particularly those who are not very familiar with the long bull trends on Wall Street. Most of the investment portfolios of a public investor are still on the lighter side when it comes to emerging markets. It should be noted that higher economic growth automatically translates into corporate profits. One of the biggest reasons that US companies are doing so well is mostly because of the growth they have experienced in non-US markets. Another advantage of investing in developing countries is the diversification they provide.
They tend to perform differently as opposed to developed economies and are more successful at decoupling from the longer and greater woes of the mature economies of Western countries. The Emerging Markets Index provided by Morgan Stanley comprises of countries like Brazil, Argentina, Venezuela, Taiwan, Poland, Egypt, Turkey, Czech Republic, Israel, India, Philippines, Russia, Jordan, China, South Africa, Morocco, Chile, Pakistan, Thailand, Indonesia, Malaysia, Hungary, Peru, Korea, Malaysia and Colombia.
Listed below are some reasons why Israel Figa recommends now as the best time for investing in developing countries:
- Their market growth beats US
Almost 70% of the world’s growth in the next couple of years will come from developing countries, with India and China accounting for almost 40% of that growth. When adjusted for the differences in purchasing power parity, the rise of emerging markets appear even more impressive. As a matter of fact, the International Monetary Fund has forecasted that the total GDP of these developing countries could end up overtaking that of developed markets in the next few years.
Experts like Dr. Figa recommend that it is better to pay attention to policies that promote economic growth when trying to determine outperforming global markets. Focusing on GDP growth is not enough because it is a lagging indicator. Countries that are able to maintain a lower rate of taxation, along with gradual currency appreciation are worth checking out.
- They helped saved the world’s economy
During the 2008 housing crash in the US and the economic crisis that occurred as a result, world markets were saved from a complete disaster and this was all because of some developing countries. These included China, India and Brazil. The global credit crisis was one of the deepest, longest and most painful ones in history. The government had to bailout bulge bracket banks and Wall Street icons like the Lehman Bros went down. As a matter of fact, it shocked the entire global economy and brought about an economic recession, along with a crisis of confidence.
However, the most important legacy, as per financial experts like Dr. Israel Figa, is the one that is yet to unfold properly; it revealed a new world order in terms of market and economic dynamics. Developing economies finally arrived as essential, powerful and permanent contributors to worldwide economic growth and sustainability.
- They are well-balanced
The balance of payments of these developing countries is significantly better than a number of advanced economies, particularly that of the United States. China has had an impressive current account surplus, as per the IMF and Russia is also on the same path. Countries like India and Brazil may have had current account deficits, but they have managed to cut them down to a great extent. The balance of payments of these developing economies are quite ahead of all the advanced economies, which is definitely a positive indicator of their growth.
- They have young working age populations
Most of the developing economies have a young working age population that can make big contributions to the economy and keep people from falling under the poverty line. For instance, the ratio of working age population to retired population is significantly higher in Brazil and India. Majority of India’s population is under the age of 44 and this trend is expected to continue until 2030. The population in the US remains flat while China’s population is aging. Hence, the number of working people who can pay taxes will go down.
- Their companies are getting bigger
There was a time when most investors turned to US, Japanese and European companies when they wanted to buy stocks, but this trend has been changing in the last decade or so. There was a time when these companies accounted for almost half of the world’s market capitalization. The US, UK and Japan, which were considered home to the most liquid stock markets in the world, made up 60.5% of the world’s market capitalization in 2005. At the same time, Russia, Taiwan, China, Brazil, Singapore and Hong Kong accounted for only 8.3%.
However, things had changed by the first quarter of 2011 as the share of UK, US and Japan in the world’s market cap had reduced to 47.4% and the exchanges of the most active developing countries had grown their share to 21.6%. Samsonite, the renowned luggage maker based in Massachusetts, had chosen to list its shares on the Hong Kong exchange rather than going for NYSE. Prada also followed the same route, as did some other renowned companies. According to Dr. Israel Figa, these companies chose to list in countries that they regarded as vital for their growth.
- They have a lot of resources
Another great reason to consider investing in developing countries is the fact that they run the gambit on resources. While Brazil has a lot of resources, China has a poor balance of resources and has to import most of its raw materials. As a whole, these developing markets have a disproportional share regarding natural resource wealth, but there are exceptions, such as Norway, Canada and Australia. The countries that are rich in natural resources benefit with the industrialization of developing countries, such as China.
Brazil reaped a lot of benefits as there was a huge demand from China for its natural resources. Vale, the country’s mining company was known as the largest iron ore exporter, and their biggest buyer was none other than China. Similarly, Brazil also had the largest farmable land all over the world and is one of the handful of countries that are considered self-sufficient in oil. They don’t have to import most of their food and when an increase in income prompts an increase in demand for agricultural commodities, Brazil plays the role of the world’s leading beef, sugar, chicken and coffee exporter.
- They have big spending
While US consumers do have the highest share when it comes to world spending, the number is constantly going down. Russia, China, Brazil and India are now outspending their counterparts in the US. The trend is expected to grow for the next few decades, all thanks to Asia as this is where half of the world’s population can be found.
China has become the leading luxury market all over the world. There are throngs of people in China who are more than willing to spend money on hot global brands. In addition, the Chinese millionaires are on the younger side as compared to their American counterparts, which accounts for greater spending.
- They are innovative and tech savvy
One of the most important factors that investors need to know about these developing countries is that they are tech savvy. Have you heard of Weibo? This is a combination of Twitter and Facebook and it was developed in China. As a matter of fact, the two companies that brought about a craze of this social network, Tencent Holdings and Sina Corporation, had eight times more users as compared to Twitter overall. In early March 2010, there were five million users on Weibo and this had increased to 140 million by the end of the first quarter next year. During this time period, the number of Twitter users was 17 million.
Experts like Dr. Israel Figa will tell you that there is a lot more room for Chinese internet companies to grow as the digital world continues to grow and expand. Alibaba is an excellent example of how China is flourishing, as are smartphone companies Xiaomi and Huawei. Another investor favorite is Baidu, the Chinese search engine. Considering the tech innovations expected in the future, emerging markets like China would be an excellent addition to any investor’s investment portfolio.
- Their equities are performing quite well
If you take a look at developing countries and compare them with developed ones, you will come to see that the former have managed to outpace the latter in terms of equity performance. Their market equities have been doing a lot better since the launch of the MSCI Emerging Markets Index in 1987 and you can also check it for the last decade. They have managed to outperform developed nations by a whopping 166%. This alone is a great reason to put your money in emerging markets.
- They give higher returns on similar volatility
One of the biggest misconceptions about investing in developing countries is that they carry a lot of risk. Numerous investors steer clear of these markets and opt for developing nations because they believe these are a safer investment option. However, in the past few decades, those who have had a blended portfolio of developed markets and emerging markets exposure have seen a similar level of volatility. The only difference is that they have also enjoyed superior returns, which means that investing in these emerging economies can certainly prove to be a sound investment in the long run.
- Their volatility is declining
As mentioned above, developing countries are considered to have a higher risk element as compared to developed ones. This is due to the fact that the former tend to be highly volatile, which means that even a small movement can result in heavy losses. However, things have been changing in the last few years as volatility within these markets seems to be trending lower now. It has remained consistently in the narrower range, as compared to S&P 500 indices and FTSE All Share. In recent times, developing markets have actually shown a lower volatility, as compared to developed markets and it has also dissipated very quickly.
- They have superior profitability
The growth in GDP of developing countries has been on the rise and this has brought about a lot of interest on behalf of investors. This makes it the perfect time to invest in developing countries, as per Israel Figa, because higher GDP will automatically translate into higher return on equity (ROE). In fact, you will come to know that the profitability of emerging market companies is superior, as compared to companies in developed markets.
Apart from these reasons, Dr. Figa further stresses that most of the world’s savings can be found in these developing countries. They actually hold almost 75% of the world’s foreign exchange reserves and they are less indebted, as opposed to their peers that are more developed. This provides these markets with a strong foundation on which they can build growth. Considering the current market conditions and economic crisis, it is a good idea for investors to diversify their investment. The best way to make it happen is to put their money in prominent emerging markets.
There are plenty of options where developing countries are concerned and investors can opt for a combination of developing and developed nations in order to balance their portfolio and generate as much returns as possible, while keeping their risks to a minimum.
