3 Booming Emerging Market Picks

Brazil, India, Africa offer ways to capitalize on surging demographics

The latest GDP estimates by the International Monetary Fund (IMF) indicate that emerging market economies will grow 6.5% in 2011 — compared to just 2.4% for developed nations. And China, the world’s fastest-growing major economy, is expected to expand at a rate of 9.5% this year.

So we have the emerging world growing at about 2.5 times the rate of the developed world, while China — the largest emerging market by population and total GDP — grows at nearly four times the rate of the developed world!

There are many reasons for that faster economic growth — lower overall economic indebtedness at the corporate and government level, improving business conditions, as well as favorable legislative and tax framework — but one of the most important remains positive demographics.

As the population of a vibrant emerging market grows, so do the number of consumers — creating a healthy rate of expansion for aggregate demand and GDP. But keep in mind that BRIC markets have very different demographic characteristics: Brazil has a fertility rate of 2.4 children per family, Russia comes in at 1.4, India is the highest at 2.7, and China’s rate is 1.8.

Buy Brazilian Bank BBD

Domestically oriented companies in countries with positive demographics will see a big tailwind behind their backs for years to come. For example, take Brazil-based Banco Bradesco (NYSE:BBD), the second largest non-government lender in the country.

The company is targeting credit growth of 15% to 20% a year, which means a much higher earnings growth rate. This year earnings are estimated to grow 22% while the shares sell at only 9.5 times forward earnings. The reason for the cheap valuation is the campaign by the Brazilian central bank to rein in inflation by hiking interest rates and increasing reserve requirements, guaranteeing a slower profit growth in 2012. The cheap valuation and positive demographics make this a stock to put on your watch list.

As for India, the central bank there again hiked interest rates this week, putting some pressure on the market. The Reserve Bank on India increased the repurchase rate to 7.25% from 6.75% and boosted the reverse repurchase rate to 6.25% from 5.75%. Those rates are still negative as inflation is forecasted to run at a 9% rate until September; that means more rate hikes and reserve requirement hikes are coming. Inflation in India is the highest after Russia among the BRICs economies, but the RBI is confident that is can lower it down to 6% by next year with the current course of action.

Buy India ETF SCIF

This monetary environment may create a trading range for Indian stocks in 2011, where interested investors should look to sell rallies and buy the dips generated by the aggressive actions of the Reserve Bank of India (RBI). Still, with the best demographics of any BRIC economy, long-term investors may be interested in building a position in the Market Vectors Indian Small-Cap ETF(NYSE: SCIF) on any RBI generated weakness. Although India is the poorest in GDP/capita from the BRIC counties, it is also the most domestically oriented, as its economy is shielded from export-driven shocks.

Buy Africa ETF AFK

Interestingly, the strongest surge in demographics in the developing world are actually in Africa. The continent is very undeveloped, and has seen plenty of turmoil in Egypt recently, one of its most promising economies, but the long-term potential is interesting considering the continent is rich in natural resources.

The only ETF that covers the frontier markers is the Market Vectors Africa Index ETF (NYSE: AFK). All the ETF’s constituents are either headquartered in Africa or generate the majority of their revenues there. South African companies comprise 28.6%, while offshore companies not domiciled in Africa, but doing most of their business there make up 19.1%. As for country-specific holdings, problematic Egypt makes up 19.1% of the portfolio, but is balanced out with the 18.5% allocation to Nigeria and the 12.3% allocation to Morocco.

The most heavily weighted sectors in the ETF are banks (31%), followed by basic resources (18.5%), telecommunications (12%), and oil and gas (9.2%). This is a unique way for long-term investors to play the group of least-developed emerging markets in Africa, yet one with the best demographic characteristics.

Why China is Still My Favorite

Of course, China remains my favorite way to play the current trends in global demographics, as they are further along in the cycle than Brazil, India and Africa, and are presenting more and better opportunities.

The Chinese baby boom generation was born in the 1960s and 1970s, putting them in their 30s and 40s.These Chinese came of age after the Cultural Revolution, had access to higher education and reaped the rewards of China’s economic boom.

Although China was a relatively poor country until just the last five to 10 years, there were plenty of opportunities in the 1990s for a generation of young, educated Chinese unencumbered by Marxist ideology. Countless fortunes have been made in the past decade — largely by Chinese born after 1960 — as a result of huge real estate and asset appreciation. It’s of little surprise that the average age of U.S.-dollar millionaires in China is only 38, compared with 54 in the United States.

And despite the institution of China’s “One-Child Policy” in the early 1980s, the country has more children relative to senior citizens than the economically more advanced neighbors such as Taiwan, Hong Kong and South Korea. China also has more than 900 million people under 45 years of age — more than the total population of Western Europe, Japan and the United States combined.

So as more Chinese than ever enter their peak spending years between 35 and 50, China’s domestic consumption is entering an era of unprecedented boom. That is one reason why Chinese domestic consumption has remained one of my most important investment themes.