Over the past few years, investors have become frustrated with the underperformance of the emerging markets (EM) —especially when compared to U.S. markets. But if we look at another comparison to the U.S., there may be a lot to get excited about. The coming growth of the emerging market consumer1 is, in fact, reminiscent of the baby boom in the United States.
When you consider the youthful demographics and the potential for the low per capita incomes to catch up with those of the developed world, the potential ramifications of this trend become clear. And it’s a trend that’s just beginning.
Stay Sensitive to Valuations
Of course, sometimes when a compelling theme like this captivates investors, they tend to bid up prices without regard to valuations. And they’re not the only ones—market capitalization indexes also fail to take them into account. But in our opinion, valuation must be a primary focal point.
That’s why the WisdomTree Emerging Markets Consumer Growth Index (WTEMCG) is fundamentally weighted. Its goal is to help investors capitalize on emerging market consumer growth trends, while maintaining sensitivity to valuation. Unlike other indexes, WTEMCG selects companies based on growth, quality and valuations and then weights them by their profitability.
Look for Broad and Direct Exposure to Emerging Market Consumer Growth
While some indexes narrowly focus on stocks only in the consumer sectors (staples, discretionary, services or goods), we believe investors should take a broader approach. Consider that as people become wealthier, they tend to spend more on health care, phones and luxury items such as bigger homes and vacations. Excluding these sectors and industries, the way many indexes do, runs the risk not only of creating a concentrated index, but also of missing out on the best opportunities.
In addition to including these sectors, WisdomTree uses a geographic revenue filter to identify companies that generate a majority of their revenue from within emerging markets, rather than just selecting the largest companies by market capitalization. We believe this increases the sensitivity to the EM consumer trend by focusing on the companies whose revenues come from within emerging markets.
Different Methodologies. Different Performance.
The graph below compares the year-to-date performance of WTEMCG against the Dow Jones Emerging Markets Consumer Titans Index (DJ EM Cons), to help illustrate the potential performance difference.