Investors who are looking to gain exposure to emerging market domestic consumption may want to consider the small cap segment of emerging markets. Russ explains why.
“If everyone in China lengthened their shirt tails by a foot, the textile mills of England would spin for a year.” That’s what one Englishman reportedly said nearly two centuries ago about the prospect of selling to, and profiting from, consumers in emerging markets.
Market Realist – The emerging market population makes up the bulk of the world’s population.
The graph above shows the total population of four of the biggest emerging markets: Brazil, Russia, India, and China (or the BRICs). The population of these economies makes up around 43% of the world’s population.
China (FXI) and India (EPI) in particular are highly populated and are, respectively, the most and the second most populated countries in the world. The population of these two countries alone amounts to around 38% of the world’s population, which is believed to be around 7 billion.
Both these economies are characterized by a rising middle-class population and a relatively young population compared to the developed world (EFA). This will aid consumption-related sectors in these economies. India—and also China to a degree (it’s transitioning from an export-driven economy)—is a demand-driven economy.
The advantage of being a demand- or consumption-driven economy is less dependence on the well-being of other economies for exports. Indonesia (IDX), which also falls under the emerging market (EEM) category, is the fourth mostpopulated economy in the world. Indonesia has also profited from being a demand-driven economy.
Brazil (EWZ) and Russia (RSX) are both commodity-driven economies, unlike India and China. Brazil and Russia are excessively dependent on commodities. If their prices fall, their economies will struggle to sustain growth.