When Emerging Markets Emerge

10/06/10 Gaithersburg, Maryland – Sometimes the best way for an investor to see ahead is to take a look and see what happened in the past. This is why Charlie Munger, the wise old vice chairman at Berkshire Hathaway, likes to say, “There are answers worth billions of dollars in a $30 history book.”

The history books have a riveting story to tell about emerging markets. This story has clues that tell us what might happen in the big emerging markets of today – such as China, India and Brazil. And these clues, like a trail of breadcrumbs, lead to one great investment theme. It’s so sweeping and powerful that it has even huge multinationals giddy at the opportunity.

First, a little of that history, beginning with postwar Japan and the “three electric treasures”…

In the 1950s, Japan was the hot story. In the postwar era, Japan’s economy began to industrialize in a big way. Investment poured in from all over the world. Steel mills and power plants and factories sprouted up quickly like bean plants. Japan soon became a big producer of ships, electronics, petrochemicals, photographic equipment, synthetic fibers and automobiles.

The Japanese people also moved from rural areas to the cities in large numbers. The population of Tokyo, for example, more than doubled in less than 10 years. With that came a hunger for new consumer goods. People ate better – that’s always the first thing to change. But these new consumers also coveted the goods that make life easier, such as washing machines, refrigerators and television sets.

In fact, demand was so high for these three goods that people called them the “three electric treasures.” Sales of washing machines quadrupled between 1953–55. Then sales doubled again in 1956. The number of TVs went up nearly fivefold in one year – 1957. And then the number doubled again in ’58!

Yet while this was going on, there were still a lot of growing pains. There was still widespread poverty. Masses of people huddled up in tiny apartments. Sewage facilities were inadequate. Water was often unsafe to drink. Traffic was terrible, since road building couldn’t keep up with the ballooning number of cars on the road. Pollution was a big problem.

Does this sound familiar? I could easily be writing about China today!

I owe these observations on Japan to the late Robert Shaplen, a longtime Asia correspondent. Shaplen first arrived in Asia in 1944, near Leyte, in the Philippines. He was a war correspondent with the 1st Cavalry Division and he landed on a beach softened up by US Navy artillery. Walking through the surf, Shaplen recalls the acrid smoke and shattered coconut trees. What a way to begin a long tour in Asia! But his departure was even more dramatic. In 1975, he would leave from Saigon aboard a Sea Stallion helicopter flown by US Marines taking communist rocket and small-arms fire near the American defense compound at Tan Son Nhut Air Base.

In between these poles, Shaplen managed 30 years of distinguished reporting on the Far East as a New Yorker correspondent. I’ve been reading pieces of his A Turning Wheel (the ’79 edition). It’s a kind of summing up of his 30-year tour of duty in the Far East, based on thousands of interviews and his own research and observations traipsing throughout Asia over that time.

In his book, Shaplen also has striking observations about that other superstar of the period: South Korea. “Seoul became Asia’s biggest boomtown,” Shaplen writes, “a throbbing metropolis of 7.5 million (one-fifth of the South’s population) and the hub of what was probably the fastest-developing nation in the world except for the petroleum powers.”

The pattern of development was the same. A man living in Seoul then saw the factories sprout up out of nowhere. In came the steel mills, cement plants and shipyards. He saw apartments and high-rise office buildings and industrial centers fill in the city blocks. He watched the massive migration of people from the farms and villages to the cities. New subways and hotels opened. It became hard to find an empty taxi. And good restaurants stayed crowded until 10 at night. People got richer. Per capita income in 1977 was four times what it was 10 years before.

I am struck by the similarities of these development stories and the ones unfolding today. I wonder if we’re seeing the same thing all over again, only the names are different. Today, it’s about China and India and Brazil. I also see another wave of similarly sweeping changes and growth in other parts of the world. I have my eye on Vietnam and Indonesia, on Colombia, the Middle East and parts of Africa.

The telltale patterns are all there…

Look at Vietnam, a market of 86 million people – more than half under 25 years of age. One of the other books I’m reading is Vietnam: Rising Dragon by BBC correspondent Bill Hayton. It’s a new book about Vietnam’s swift rise. Again, you see the same patterns repeat. “Vietnam is in the middle of a revolution,” Hayton writes, “capitalism is flooding into a nominally communist society, fields are disappearing under new industrial parks, villagers are flocking to booming cities… It’s one of the most breathtaking periods of social change anywhere, ever.”

The money is pouring in. The factories are going up. Samsung has a $700 million plant in Hanoi. Intel has a billion-dollar chip plant outside of Saigon. Canon, Hon Hai, NEC and many others are already there. Yet ports are congested and roads are poor. It reminds one of the early years of Japan or South Korea…or China.

If you listen to what companies are saying – especially some of the big multinationals or some of the small pups with operations overseas – these kinds of markets get them excited.

They think about all the razor blades and batteries and beer they can sell. Really, for the first time, we’ll have hundreds of millions of people that can buy simple things like a can of baked beans. (As one H.J. Heinz manager working in Nigeria says, a can of baked beans is “considered a special treat here.”)

Take Proctor & Gamble, a huge consumer products company. It estimates that if people in China and India spent at a level comparable to that in Mexico, P&G’s sales would grow by $40 billion. That’s huge for a company that generates $79 billion in sales today. That potential $40 billion prize has sharpened the attention of P&G’s top brass. And it’s a lure for competitors as well.

What will drive these sales is the bulging global middle class. That middle class gets more than 70 million new members a year – on its way to 2 billion in two decades.

I am most optimistic about investing when I think about this big picture. The emerging markets will provide lots and lots of investment opportunities over the next several years. Watch this space…closely and continuously.

Chris Mayer
for The Daily Reckoning

Chris Mayer

Chris Mayer is managing editor of the Capital and Crisis and Mayer’s Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012 Chris will release his newest book World Right Side Up: Investing Across Six Continents. 

View articles by Chris Mayer

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