Pop Quiz

What do the following major brands have in common?

• Budweiser
• Lysol
• Ben and Jerry’s ice cream
• 7-Eleven
• Gerber baby food
• Brooks Brothers
• Motel 6
• American Idol
• Wild Turkey bourbon

If you said that they are all owned by non-U.S. companies, go to the head of the class. The United States represents only 30% of world stock market capitalization. Put another way, by not investing outside the U.S. you are missing 70% of the world’s investment opportunities.

How do you decide where else in the world you want to invest your money? It pays to look at GDP growth rates. Why? Because, long term, stock prices correlate to GDP. When an economy booms, its stock prices follow.

Japan is a good example.

A Look Back at Japan

From 1950 through 1980, Japan was considered an emerging market. Over this 30-year period, GDP in Japan increased by an average of 7.4% a year. And stock market returns were staggering. The Japanese market had a 70-fold increase in value!

During this same time, the S&P 500 had just a seven-fold increase in value.

So Where’s the Growth Now?

This chart from the IMF says it all. There is a huge difference between the emerging economies and the advanced economies:

GDP Growth Rates

This wasn’t always true. Today’s global economy is different than anything we’ve seen since World War II. For 50 years, because of its size, the economy of the United States was able to lift or sink the economic boats of every other country. Hence the old adage:

“When the U.S. sneezes, the rest of the world catches a cold.”

But consider that emerging market countries now represent about 30% of world GDP – about the same as the United States. Meanwhile, the emerging markets have 87% of the world’s population. 87%! That’s one reason it’s estimated that 70% of the growth in global output will come from emerging economies.

The IMF estimates that global growth this year will come in at around 4%. But let’s take a look at a few select countries:

In Sound Profits, we’ve talked about why the emerging market economies are growing so rapidly. One reason is their growing middle class. As per capita income increases, so does consumer spending. That translates to earnings growth. And earnings growth translates into higher stock prices.

Where to Invest

The emerging markets are the growth story of our lifetime. You simply have to be on this train.

It’s relatively easy to get exposure to the emerging markets. Maybe the simplest way is to buy an emerging markets ETF. A good choice is the Vanguard Emerging Markets ETF (VWO). It has a low expense ratio of 0.27% versus the category average of 0.70%.

In VWO, you’ll find stocks like Gazprom, Petrobras, and China Life Insurance (a company that has been around since 2005, has $19 billion in assets, and has good volume).

Other Alternatives

Are you are most comfortable investing in U.S. companies?  Well, there’s an indirect way to profit from the growth in the developing world: Invest in U.S. corporations with significant exposure to the emerging markets. Many U.S. companies derive a large percentage of their profits from the developing world. Many of these U.S. multinationals also pay a reasonable dividend.

Andy Gordon has a number of them in his Sound Profits portfolio. And he has been racking up big gains for subscribers.