How to buy the next McDonald's

By Jim Jubak

By 2015, one-third of companies in the Financial Times Global 500, a list that's roughly the global equivalent of the U.S. Standard & Poor's 500 Index ($INX), will come from the world's emerging markets, according to business consulting firm Bain.

Makes sense to me. Economic growth in general is higher in the world's developing economies, such as those of China, India, Brazil and Indonesia, than in the developed economies of the U.S., the euro zone and Japan.

The growth differential is even greater when you look at just that part of the global economy consulting firm McKinsey calls fast-moving consumer goods: soft drinks, laundry detergent, frozen pizza, etc. It’s exactly this segment of the economy that spawns big brand names, giving companies the kind of broad-based popular recognition that translates into big stock market capitalization.

Compound annual growth in fast-moving consumer goods in developed markets for the period from 2005 to 2010 will average 4% for developed economies, according to McKinsey. Germany, at 3%, will be slightly below average. The U.S. and the United Kingdom will be slightly above average at 5%.

Compound annual growth for fast-moving consumer goods in developing economies is forecast at 10% overall and 11% in China and India. The forecast for Indonesia is 16%.

As if that weren't enough, there's more than just the big growth differential trending in the direction of increased representation for emerging markets among the list of the world's biggest companies.

Global cash flows are moving in the same direction. Global financial assets had climbed to $167 trillion by 2006, up from $43 trillion in 1990, according to McKinsey. Emerging markets accounted for $24 trillion of the 2006 total. That's more than half the global total in 1990. Among emerging markets in 2006, China accounted for $8 trillion, other parts of Asia for $11 trillion and Eastern Europe for $3 trillion.

The flow of global financial assets toward emerging markets has still left them underrepresented in the financial markets. In 2006, emerging markets accounted for 23% of global gross domestic product but just 14% of global financial assets.

Looking for the bandwagon

By this point, your question should be, "How do I get in on this trend?"

It's hard. Don't kid yourself. Investing in emerging markets can be like walking through a minefield guided by a map with huge holes in it, but I think it is possible with enough hard work and an understanding of the terrain.

First, three problems:

• In the U.S. economy, often it's who you know rather than how well you run your business that matters. That's even truer in emerging markets. In Brazil, the legislature is debating how much of the new oil discoveries made by Petrobras (PBR, news, msgs) should go to the government and, perhaps, a new national oil company. In China, the government just completed reshuffling the assets of the country's largest mobile-phone companies to "increase competition."
• In the U.S., the path from private company to publicly traded company is relatively straightforward. In developing markets, such as India, family-controlled companies often spin off a bit of themselves to the public market, giving shareholders the right to participate in ownership but leaving control effectively in family hands. China presents its own wrinkle on this in the form of state-owned companies and companies controlled by local governments or institutions such as the People's Liberation Army.
• In some countries, such as India and China, whole markets are effectively off limits to international investors. You may want to own shares of phone company Bharti Airtel, for example, but unless you open an Indian brokerage account, forget it.

But there are some offsetting advantages, too. Here are three:

• Patience counts. The rise of the globe's emerging financial markets and of global brands and companies from those markets is a long-term trend. You've got plenty of time to do your homework and still get in on the trend. This one is going to run for a while.
• There are lots of different vehicles to use to invest in this trend. If researching and picking individual company stocks is daunting, how about buying into a bank that invests in the sector, like Standard Bank Group (SBGOY, news, msgs) of South Africa? Or how about an actively managed mutual fund such as Matthews India (MINDX) or an exchange-traded fund like Market Vectors Brazil Small Cap (BRF, news, msgs)? (For more on Market Vectors Brazil, see my blog post about it.)
• Even the extreme volatility of emerging financial markets works to the benefit of the patient investor. You'll get lots and lots of chances to buy in cheaply as these markets crash and soar around a trend line that is climbing on average.

This last point is worth exploring in more detail.

Continued: Learning from a dud

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