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.