Between the euro and the ongoing debate over whether Chinese growth is sustainable, 2011 was rocky for emerging markets. Let’s take a look at where we are now.
Out of the big three economic regions, the United States — still the biggest in the world at about 30% of global GDP — provides plenty of solace. The macro numbers have held up well. That’s the good news.
The data out of Germany, on the other hand, tell us that we might indeed get a recession out of Europe. If the engine of the euro zone is foundering, the rest of the continent is in bad shape indeed.
China has more questions than answers, as always. The banks may be brittle, starved for cash and choked with bad debt. The real estate market may have always been a dream. But what we know is that Beijing is not going to let the world see their hard-won economic miracle collapse, and they have over $1 trillion in reserves to spend to make sure the world doesn’t end.
So if the 2011 hangover from Europe and Asia is dominating global markets right now, where do we look for growth?
Stop looking to commodities and the industrial names as your go-to trading basket. Stop buying copper and iron ore and steel for their own sake — you can still buy them as opportunities present themselves, but they are not the main game in town any more.
Instead, look for consumer names. This is the side of the global economy that policymakers are looking to develop. It is going to be a different type of growth and these names are going to be a little harder to find, but they are out there if you know where to look.
Think New Orient Education (NYSE:EDU) instead of Vale (NYSE:VALE), which became a global darling for selling China all the iron ore it could digest over the last few years. EDU is a good case in point. Beijing is vowing to push future stimulus funding into developing the domestic economy, which means health care and education, and not the debt-fueled infrastructure boom we saw in the past. All those new Chinese schools have already been built, and now it’s time to fill them with the best curricula and materials available.
In India, think Sify Technologies (NASDAQ:SIFY) for its exposure toIndia’s data-hungry middle class, which is already the biggest in the world and growing fast. India is also exciting a lot of the people I work with because they are finally opening their market to direct foreign investment. This is huge — few Western investors are really aware of how limited their exposure to this economy actually is.
Meanwhile, emerging market central banks are easing. We are looking at places like Latin America where just a few months ago rates were still on the rise. Now, everyone from Brazil’s COPOM board on down to the frontier markets are loosening monetary policy as fast as they can in order to keep the economic wheels turning. As such, another theme this year is buying the banks. There is a lot of relief in Latin America right now as rates drop and take the pressure on credit quality with them. This is going to show up in these institutions’ margins and, eventually, their price action.
And keep playing the consumers, which is why a lot of people sign up for emerging markets in the first place. We love the Russian cellular names — Mobile TeleSystems (NYSE:MBT) and VimpelCom (NYSE:VIP) — and in Latin America, America Movil (NYSE:AMX) is unquestionably one of the best carriers in the world.