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The Best Opportunities for Investment in Emerging Markets

Emerging and frontier markets have opportunities for investment growth that often aren't available in more-developed economies. These come from three main sources: new, pervasive technologies; the improved spending power of a growing middle class; and gains from greater trading activity with other countries. When you look at investments, you want to look at how these changes create growth opportunities.

Leapfrogging technologies

Are you waiting for the app that lets you use your cellphone line as a debit card, allowing you to take money from your checking account to pay for your groceries without any additional card or fuss? It's already the standard form of payment in Kenya, but barely found in the U.S.

One of the greatest opportunities in emerging markets is to be on the ground floor of companies that are working on technologies that aren't yet economically feasible for big multinational corporations to try. Some of these technologies are low, and some are high. Investments in the securities of the companies that make these technologies may be a profitable path for playing in emerging markets.

Here are some of the characteristics related to technological advancements in emerging markets:

  • The technology that succeeds often emphasizes products that are smaller and more basic than the products in developed economies. In fact, some products may seem like a step backward to people in developed countries, but they can be vital to making life better for those living in less-developed countries. Here are two examples:

    • Farming equipment: The world's premier agricultural equipment companies are based in the United States and have been exporting equipment to developed nations for years. The equipment is so good that Chinese companies haven't tried to match it. Instead, the equipment that Chinese agricultural equipment companies make is designed for small farmers with simple, low-cost operations. This Chinese equipment is much in demand in Africa.

    • Water pumps: In Africa, KickStart offers a water pump for just a few hundred dollars that looks like a StairMaster workout machine. Made in China, it allows small farmers with more labor than capital to harness their energy in order to water more soil than they could do by hand.

  • Many new technologies can't offer 100 percent reliability. If you have no electricity, a solar system that works 85 percent of the time is a huge improvement in your life. That product won't work for people with reliable electric power, but how long will it be before companies in developing countries making solar cells that work 85 percent of the time come up with solar cells that work 99.99 percent of the time? That's where the technology opportunity is in emerging markets.

    Companies that master low technology often go on to design and build better products that can be sold to customers in developed countries at lower prices than they see now. At one time, Japan was a developing country, and Toyota made inexpensive cars that the Detroit firms weren't interested in building. Toyota is now the largest automaker in the world, and Japan has one of the world's most developed economies.

  • The high rate of education and the low cost of living in some emerging market countries attract companies that want to become high-tech leaders. This is especially true of places where English or a European language is commonly spoken. Successful high-technology ventures generate big profits and create excellent, high-paying jobs. Hence, economic development officers are always looking for ways to attract high-tech ventures.

    Be aware that their hopes are sometimes inflated. India became a technology hotbed because the country has an educated workforce that speaks English and a network of citizens who worked for technology companies in other countries and who became advocates for their compatriots back home. Another country, one with an agricultural economy and a low literacy rate in any language, may dream of the jobs that helped build India's middle class, but it isn't going to be a hotbed of semiconductor design any time soon. So protect yourself and don't invest on wishes and dreams, as delightful as they may be.

Growing the middle class

To a certain extent, an emerging market is really a market where a middle class is emerging. As jobs and opportunities are created, more people move out of poverty and into a comfortable middle zone where they can afford some luxuries that were previously unimaginable. They go out and spend their money, creating more economic activity. They need refrigerators, washing machines, and cars. They have money to pay their children's school fees and to give their children shoes and toys. Eventually, they want designer purses, big-screen televisions, and annual vacations, too.

As a country's economy improves, the poorest people tend to become less poor, and even they have more money to spend. Even a small improvement in income represents a huge increase in purchasing power. Yes, the money goes to subsistence needs, especially food, but even that spending power represents an improvement in an economy and in the health of the people.

Improving trade opportunities

Before they enter frontier or emerging market status, many markets are closed to outsiders. If people in a country are unable to produce whatever goods they need, they just do without. Open trade, however benefits both the importer and the exporter. It lets people capitalize on their skills. If they're good at making something, they can keep doing that even if they make more of a good than people at home can use. And if they need something, they can buy it from those who produce it, wherever they are.

Here are some facts to understand about trade and emerging markets:

  • If a nation's businesses can produce something at a lower cost than it can be produced elsewhere, even after adjusting for extra time and higher error rates, the country is going to benefit from trade. And that's where emerging markets find their niches. Companies in the United States, Europe, and Japan make the best-quality cars in the world, but not everyone in the world wants the best-quality car. Some people are willing to accept a lower-quality car, made by less-skilled labor, in order to have basic transportation.

  • Free trade is trade between nations free of quotas (limits on the number of an item that can be brought into a country each year) and tariffs (tax, usually known as a duty, charged to importers of an item). Tariffs may be low enough to simply offset some of the payrolls lost when the item was produced overseas, or they may be so high that it makes no sense at all to buy the imported item. In addition to tariffs, governments sometimes protect local industries through regulation. Regulation is one subtle way to create a barrier to trade without a tariff or a quota.

    Because trade moves better when it's free of restrictions, 159 nations have joined the World Trade Organization, which negotiates the rules of trade among nations and settles disputes as they arise.

  • Fair trade is a movement to give producers of agricultural products and handicrafts in developing nations some of the advantages of their competitors in developed countries in order to make the terms of trade equal. Many of the organizations involved in fair trade operate programs on an ad hoc basis, but some international federations are trying to improve markets and to create branding that would attract buyers in developed countries. One such group is Fairtrade Labelling Organizations International.

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