Thoughts on Emerging Markets - Emerging Consumers

For the past decade, the story of the emerging markets was one of export driven growth. What a story it has been. The economic engines of China, India, and Brazil have transformed the global economic framework. Exports will continue to be a core component of growth in the major developing economies. The export economy has lead to rising incomes and a developing middle class in these countries. This, in turn, is creating the conditions for a new driver of growth in the developing world - domestic consumption of goods and services. I'd suggest that this local demand for goods and services may well be the factor that will lead the next bull market. Here, we are not talking about a trade but rather a longer-term theme that investors may want to consider when building their core portfolios. So how does one play it. There are several fronts but today I'd like to focus on packaged goods and consumer staples. There is an arbitrage of sorts going on where consumer goods companies are using the steady cash flow received from slower, mature markets (read developed world) to expand in the faster growing, higher return economies of the developing world. I've usually stayed away from consumer companies as their valuations have been relatively high on typical metrics such as P/E, P/Book and PEG Ratio. The recent bear market combined with the accelerating growth of the developing world, has made these types of companies cheap on a historical basis. Well-managed firms with significant exposure to the developing world such as Unilever, Heineken, Pepsi, Coca-Cola, P%G, Nestle as well as others are selling below 15 times earnings. These companies represent strong global brands and are worth a look.