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2 Ways to Play the Budding Emerging Market Consumer

Here’s an interesting statistic for you: In a given year, China Mobile (CHL) — one of China’s three major mobile carriers — adds more new subscribers than the entire living population of England. China Mobile added 60.7 million new customers in 2012, bringing its total to more than 710 million. Jolly old England has a total population of 53 million.

With a consumer base that large, you might think that China Mobile’s growth prospects would be waning. And you’d be dead wrong.

Only about 88 million of those 710 million subscribers are 3G customers. And data accounts for just 12% of revenues.

In other words, even if China Mobile never adds another new customer — which is a ludicrous thought — the company would still have incredible growth prospects in front of it due to existing customers making the upgrade to smartphones and higher-end service contracts. This is growth potential that AT&T (T) and Verizon (VZ) would kill for.

I like China Mobile, and I’m long both personally and in client accounts. But I’m not here today to make the bullish case for China mobile or even about China itself. Instead, I want to tell a much bigger story, one about the emerging market consumer.

Emerging Market funds
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Emerging markets have had a rough 2013. As a group, their currencies took a hit during the “taper tantrum” of the spring, and most have seen their stock markets lose money this year. The iShares China Large Cap ETF (FXI), iShares MSCI Brazil (EWZ), and PowerShares India (PIN) — three of the most popular single-country emerging market ETFs — have all been trending downward since 2011.

But while their stock markets may be out of favor, living standards have continued to rise. Average urban Chinese wages rose almost 10% last year, even after adjusting for inflation, and 87% of Chinese families own or partially own property today. Brazilian real wages have risen by nearly half in the past decade, and the Brazilian economy is now larger than that of the U.K. Even India, which has a well-deserved reputation for economic mismanagement, managed to see per-capita income growth of about 12% in the past year.

A new global middle class is emerging — one that Ernst & Young expects to grow by more than 3 billion consumers in the next two decades.

As an investor, you can go about reaching these consumers in one of two ways. You can buy shares of emerging-market companies that sell directly to their own domestic consumers, or you can buy shares of Western firms that get a disproportionate amount of their revenues from emerging markets.

The best “one-stop shop” I have found for investing directly is the EG Shares Emerging Market Consumer ETF (ECON). As I wrote recently, the underlying companies get about 90% of their revenues from selling within their home markets and to other emerging markets. ECON is loaded with great consumer names such as South African media giant Naspers (NPSNY) and Brazilian brewer AmBev (ABV).

As for Western firms with an outsized emerging market presence, your best bets are in Europe.  Access to China’s high-rollers was a major reason that I chose Daimler (DDAIF) as my choice in InvestorPlace’s Best Stocks of 2013 contest. But perhaps the best “buy and forget” options are consumer products and food giants Unilever (UL) and Nestle (NSRGY). Both are stable performers with long histories of paying and raising their dividends.

And both have monster presences in emerging markets. Unilever gets nearly 60% of its revenues from emerging markets, and Nestle gets more than 40% with a goal to surpass 50% within a few years. These are essentially emerging market stocks that happen to have a European address for their corporate offices.

The rise of the emerging market consumer is real. There are different ways to invest in this durable macro trend, and not all will be appropriate for every investor. But if you want to enjoy consistently high returns in the decade ahead, you can’t ignore this trend.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long ECON, CHL, DDAIF, NSRGY, UL and FXI. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar, but also which stocks will deliver the highest returns. This series starts Nov. 5 and includes a FREE copy of his 2014 Macro Trend Profit Report. 

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