The Investor

Globalize Your Portfolio!

Sure, you may have lost your job to China, but that's no reason not to invest there. You'll regret it if you don't.

By 9.15.11

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Sure, you may have lost your job to China, but there's still no reason not to invest there -- and India, Brazil, Indonesia, and other emerging markets. In fact, it's a financial imperative.

That is the message I took away from a breakfast program at the Ritz-Carlton in northern Virginia last week by my friend, investment advisor and fellow St. Louis expatriate Pat Kearns. He hosted a presentation by Cam Cowden, a vice president with the Oppenheimer Funds.

Consider that there are now a billion and a half middle class consumers in emerging markets and that number is expected to grow to over 3 billion by 2030. Cowden calls this massive expansion of the global middle class "the biggest economic event of our lifetime" -- at least for investors (which include almost everyone when you factor in pension funds, IRAs and the like). This emerging middle class embodies the customers who will be the all-consuming focus of American businesses. These consumers will decide the winners and losers in the great global competition.

Cowden cited Yum Brands, which owns and operates KFC and Taco Bell among other such businesses. 64 percent of its revenue comes from overseas, and it has a 40 percent market share in China, where it opens four outlets a day.

General Motors, which sells cars in 120 countries, sells more cars in China than in the U.S. Moreover, while there are 900 American drivers for every 1,000 people, there are only 30 Chinese drivers per 1,000. The potential growth is unimaginable. According to the World Bank and other sources, China alone will account for 28 percent of world GDP by 2035.

Evidently, only one out of eight people in India brush their teeth every day. It is not impossible, given the rate of population and economic growth, that one half of the population will start brushing over the next two decades. Already Colgate generates 24 percent of its revenue from overseas. Can flossing and gargling be far behind?

Coca-Cola garners 80 percent of its business abroad, doing very nicely, no doubt, in many countries where alcoholic beverages are frowned upon.

Eight-seven percent of the world's population lives in emerging markets countries. Even more important, again, from the perspective of economic growth and investment, these are very young and vibrant populations. Of Brazil's nearly 200 million citizens, 43 percent are between the ages of 25 and 54. Only 14 percent are over 54. India has 600 million of its 1.2 billion citizens under the age of 24, ready and willing to enter the work force for decades to come. These are the earners and spenders who will drive economic growth for the long term.

Pat Kearns opined that when it comes to emerging markets, mutual funds make a lot more sense than trying to pick stocks across the globe where you have differing cultures and accounting standards.

I was particularly struck by the fixed income opportunities presented by these emerging economies. Cam Cowden reviewed the yields on various countries' bonds as well as their debt-to-GDP ratios. The data is telling. Compare the U.S. and its 10-year Treasuries at 1.78 percent yield (and dropping), with a debt/GDP ratio of 93 percent, versus Brazil with a 12.32 percent yield on its 15-year government bond and only a 64 percent debt/GDP ratio. For Turkey, the numbers are 9.46 percent and 45 percent respectively. For Mexico, which has not had very good press of late given drug wars and immigration issues, its yield is 6.13 percent. Its debt/GDP ratio is 45 percent.

Mr. Cowden, warming to his theme, described the present time as a "golden age" for emerging markets for fixed income investments. In addition, 62 percent of U.S. goods are imported. Wages overseas have been going up at the rate of 13.6 percent.

So there is a need to globalize your portfolio to take advantage of growth sufficient to get you ahead of the inflation curve.

Pat Kearns observed that in a democracy like ours, it is tough to do hard, unpopular things such as cut spending on benefits or raise taxes. Inflation becomes "Door Number 3" which gives politicians a way to reduce debt painlessly -- for them, that is. Low returns on bonds in this country are a real problem for investors, said Kearns, recalling that for thirty years, 1950-1980, the U.S. experienced a bear market in bonds. Thus, fixed income investment opportunities in emerging markets are important to consider.

So the investor ain't in Kansas anymore. Not even New York.

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About the Author

G. Tracy Mehan III served at the U.S. Environmental Protection Agency in the administrations of both Presidents Bush. He is a consultant in Arlington, Virginia, and an adjunct professor at George Mason University School of Law.