Over the past few years, some investors have become frustrated with the underperformance of the emerging markets (EM)—especially when compared to the U.S. markets.1 But there is a subset of the emerging markets, the EM consumers, that may offer a lot to get excited about.
One of the major themes that we believe will drive much of the global economy over the coming years is the rise in potential growth from EM consumers. Given the youthful demographics of emerging markets and the potential for their low per capital incomes to catch up with those of the developed world, the likely ramifications of this trend could be large.
More importantly, we note that the rise in the middle class in EM is more than a “sector” idea. Companies from a wide cross-section of the economy and markets—such as insurance companies, banks and health-care companies—could have as much potential to benefit from a growing emerging market middle class as a typical car company (Consumer Discretionary) or food company (Consumer Staples). The WisdomTree Emerging Markets Consumer Growth Fund (EMCG) seeks to broadly reflect the growth in purchasing power of consumers in these local economies by including a broad cross-section of sectors, outside of the typical Consumer Discretionary and Consumer Staples exposures.
As of December 31, 2014, EMCG beat 96% of the 793 emerging markets open-ended (OE) mutual funds and exchange-traded funds (ETFs) in 2014 based on total return.2 This, in our opinion, illustrates the strength of the EM consumer in the face of heightened uncertainty. In contrast, the Dow Jones Emerging Markets Consumer Titans 30 Index (DJECON) ranked 297 of 793 mangers and beat a paltry 63% of its peer group. Table 1 details the key rationale for EMCG’s 5.80% outperformance compared to the DJECON and its 6.26% outperformance against the MSCI Emerging Markets (MSCI EM) Index in 2014.