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2011 was a rough year for emerging markets across the board as investors pulled cash out of these volatile economies and loaded up on bonds and ultra-safe U.S. blue chip stocks instead. Broad funds were hard hit, as some fell by as much as 30% on the year while sector-focused funds, which obviously have heavy concentrations, were even less in demand thanks to their undiversified nature. Yet despite these large declines and the uncertain outlooks for the emerging markets of the world, one corner of developing markets looks to rebound quickly once the world economy picks back up again; the consumer sector.
The consumer segment looks to remain in focus thanks to the favorable demographic picture in many emerging nations as well as the surging personal incomes. With an increasing number of people and a vast number jumping into the ranks of the middle class, citizens of major emerging markets are likely to open up their pocketbooks and spend their considerable savings on everything we take for granted in the West. If this trend continues, it could be great news for not only American and European companies that do a great deal of business in emerging markets but also the home grown companies as well. In fact, despite the ‘premium’ billing of many Western brands in developing nations, it is really the local firms that are gaining market share and are the top choices for those in the rapidly expanding middle class (read Go Local With Emerging Market Bond ETFs).
Luckily for investors seeking to play this trend, there are a number of ETFs that can offer exposure to the section on both a national and regional scale. While the regional and global ETFs certainly offer a great way to gain access to the consumers in these markets, another interesting way is to look at the consumer firms in the three most dynamic BRIC nations; Brazil, India, and China (see Top Three BRIC ETFs). This subset of the BRIC bloc represents countries that are truly emerging and have strong demographic profiles, two factors that are in stark contrast to the rapidly decaying Russian market which is also experiencing a bout of political risk at this time. For investors who are interested in learning more about these nation-focused ETFs, we have highlighted three quality choices below that should help to give more access to the dynamic consumer markets in these surging nations.
Global X China Consumer ETF (CHIQ - ETF report)
The Chinese consumer has incredible potential that is just beginning to be realized by investors and producers alike. The country is already the world’s biggest car market and could close in on the title of largest luxury market before too long as well. Furthermore, overall retail sales have tripled in the past decade and disposable income for urban Chinese has nearly quadrupled in the same time period, suggesting that consumers are beginning to spend but still have a great deal of reserves that could open up the sector in the near future (also read Forget FXI: Try These Three China ETFs Instead).
For investors seeking a targeted play on the Chinese consumer, CHIQ, which tracks the Solactive China Consumer Index, is a great choice. The fund holds 40 securities in total focusing in on firms that are large cap securities. Top sectors include retail (25%), food (20%) and automobiles (19%), suggesting that the fund has a nice balance between discretionary and staples. Unfortunately, the fund finished down close to 25% in 2011, but a dividend yield of nearly 3% and double digit earnings and cash flow growth looks to soften the blow going forward.
EGShares India Consumer ETF (INCO - ETF report)
Although India is far poorer on average than its Chinese counterpart, the country does have a few positives which could make it a great consumer market in the near future. First, while China’s population may be topping out in the near future, India is still young and growing, meaning that the nation is only just now approaching the height of its ‘demographic dividend’ period. Additionally, according to research by McKinsey, income growth is expected to be roughly 5.3% a year for the next fifteen years. Furthermore, although many live in near abject poverty today, the income distribution curve is expected to widen and be more inclusive, opening up a nation with roughly the total population of the U.S. to middle class lifestyles (read India ETFs: Behind The Crash).
If this sounds intriguing, a closer look at the relatively new INCO could be the way to go. The fund invests in 30 securities in total, tracking the Indxx India Consumer Index. The fund is pretty well split between consumer discretionary and consumer staples firms, giving exposure to both sides of the rising Indian middle class story. Much like its Chinese counterpart, INCO has had a rough 2011, at least in the short time it was on the market as the product debuted in early August. Nevertheless, the fund does sport a solid 2.4% dividend yield and double digit growth rates in earnings, sales, and cash flow, suggesting that 2012 could be a better time for this sector.
Global X Brazil Consumer ETF (BRAQ - ETF report)
The Brazilian consumer is an especially interesting case for a few reasons. First, inflation is still rather high in the country and a great deal of the recent spending has been fueled by credit. While this isn’t always a problem, credit growth continues to soar and default rates are picking up across the economy. With that being said, Brazilians have shown that they aren’t afraid to spend unlike their Asian counterparts while it also doesn’t hurt that Brazil has an average GDP (PPP) nearly $4,000 higher than China and three times more than India, giving the citizens in the South American country greater flexibility anyway. Lastly, with one of the higher discount rates in the world, currently at 11%, a continued move lower could help to make debt payments more manageable for people in Brazil and ensure that the consumer economy continues to hum along (also see Brazil Small-Cap ETF Showdown).
If this situation seems promising, an investment in Global X’s BRAQ could be warranted. The fund tracks the Solactive Brazil Consumer Index which gives exposure to 32 companies in the South American country’s consumer sectors. Food and beverage firms dominate the list of holdings, making up nearly 46% of total assets, although retail (19.7%), personal goods (17.3%), and travel & leisure (16.5%) also receive decent weightings as well. Much like the other two funds on this list, BRAQ gives investors a nice mix between staples and discretionary, ensuring that no one aspect of the market dominates the total return. Unfortunately, BRAQ was also a big loser in 2011 as the fund declined by 25% over the course of the year. Yet, the fund still does have some strong underlying fundamentals, including a price/sales ratio below 0.7, a dividend yield of 2.7% and a long term earnings growth rate of 15.8%.
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