Invest in the Emerging-Market Consumer in 2012

The early days of 2012 have brought nothing new to global markets. The global economic and geopolitical picture remains uncertain and market volatility continues to be high. This pattern should continue until the major headwinds facing the global economy begin to abate.

Europe remains the weakest link in the global economy and the region’s ongoing sovereign-debt crisis threatens to wreak havoc on the global financial system. Consequently, we maintain our view that Europe will lapse into recession this year. Most indicators of European growth continue to hover at recessionary levels. This means that additional fiscal austerity measures and deleveraging in the banking sector will only push these indicators lower. Consequently, corporate margins should continue to shrink and profits will remain low.

The EU sovereign-debt crisis is far from over. As 2011 economic data begins to trickle in, it’s become obvious that EU policymakers wasted valuable time in addressing the crisis. Greece is one of the greatest offenders on that front; the eunuchs that dominate the country’s political elite have been pathetically unable to work toward implementing proposed measures. This inability, combined with early inaction from the EU’s core countries, has left Greece in dire straits.

Italy’s no better off. Various lobbying groups have been fairly successful at sabotaging the reforms the government is attempting to implement. But there’s a crucial difference between Italy and Greece: Italy is too big to fail, Greece isn’t.  

However, US economic data continues to come in better than expected. If this pattern continues–especially in regards to bank credit growth–the US economy will comfortably grow its gross domestic product (GDP) by more than 2 percent this year. Even this level of sluggish growth should be viewed as a positive development.

It remains to be seen whether the US–in combination with some of the major emerging economies–will grow enough to allow the US-based corporations to post relatively strong earnings growth. Unfortunately the picture is still too hazy, and investors will remain jittery.

Emerging markets as a whole should outperform developed markets this year. That being said, the coming economic weakness will affect all markets because exports and domestic growth will slow.  

However, some major emerging economies, led by China, have the fiscal and monetary leeway to support growth in the event of persistent weakness in the developed world. Brazil, China, Indonesia and Thailand, for example, have already started easing monetary policy. Nevertheless, emerging economies are not immune to a collapse in the EU or a slowdown in the US economy.

But barring a total collapse of economic growth in the EU, the European Central Bank and the US Federal Reserve should begin a program of quantitative easing by the second quarter of the year. In addition, inflation in emerging economies has been falling. Inflation in Asia, as a whole, has fallen below 5 percent from more than 6 percent at the end of last summer. Meanwhile, inflation in the emerging economies as a group stands at just more than 5 percent. These are not bad numbers given the growth rates these economies are experiencing.

After surveying the world’s economies, the emerging-market consumer seems the best bet for long-term investors, as has been the case for the past three years. In the BRIC nations (Brazil, Russia, India and China) alone, domestic consumption accounts for just 46 percent of GDP, and this number is still growing. Given that wages are still increasing, the emerging-market consumer should remain resilient in 2012.   

China, South Korea and Russia are our favorite markets as we enter 2012. We suggest that investors with an appetite for risk consider establishing positions in high-quality Indian equities. The Indian market underperformed in 2011 and the country’s economy is currently at a crossroads, as India’s political establishment struggles to agree upon or implement policies that will boost investment in the country.

Politicians in New Delhi can blame the European sovereign-debt crisis for the woes of the Indian economy. But their mismanagement of the economy, overblown populist rhetoric and interparty fighting is what has prevented them from enacting much-needed measures to ensure sustainable economic growth.  

That being said, a positive surprise from India’s economy will take the market sharply higher. Should this scenario play out, our favorite stock is Tata Motors (NYSE: TTM). The automaker is the country’s dominant producer of commercial vehicles and controls 60 percent of the market. The company is also a leading manufacturer of passenger cars in India and owns the Jaguar Land Rover (JLR) brand of luxury cars and sport utility vehicles. Tata Motors acquired JLR from Ford Motor (NYSE: F) in 2008 for USD2.3 billion.  

JLR is Tata Motors’ trump card this year. With this acquisition, Tata Motors increased its exposure to the fast-growing Chinese market, where it doubled the number of Jaguar and Land Rover dealerships to 100 in 2010. The Chinese auto market has seen rapid demand growth for luxury vehicles and is the ultimate target market for the company’s new Range Rover Evoque model, which has sold well across the globe.