Plenty of Room for Growth in this “Mature Economy”

Plenty of Room for Growth in this “Mature Economy”

It’s funny to me how many people are constantly shouting that the sky is falling in the investing world these days.  Often these “experts” are referred to as “perma-bears” because their outlook is perpetually negative and their investing advice is almost always based around caution.  The main rationale for this approach these days appears to be the idea that with no middle class (re: the American Consumer) the world’s economies are doomed.

Photo from NASA

I’ve heard many of the talking heads on TV claim that we are in a “mature economy” and consequently, most companies are not good bets for capital growth (especially companies in the ultra-mature American market).  The going theme of these “perma-bears” is to put your money into ultra-safe companies (like the General Motors of yesteryear?) and collect dividends, in addition to stocking up on bonds and GICs.

This is ridiculous to me for so many reasons.  Foremost among the reasons why the world’s economies will continue to grow is that there is plenty of room for it!  Who is best positioned to take advantage of this growth you might ask (calling this merely a “million dollar question” would be heavily understating things)?  I would argue that the good ole’ American companies that are supposed to operate in a mature economy are.

Saturated and Mature – That’s Us!

While there is definitely an argument to be made that the typical European, American, and overall Western World consumer is tapped out at the moment, I’m sure they will be back at the trough eventually.  We have clearly gorged ourselves on debt, and need to undergo a fairly painful pullback before we can begin to buy things even close to our old rates (or we can just riot in the streets and elect socialist governments… I’m sure that will be more effective).

That doesn’t mean that we are down and out however, there is still an unbelievable amount of wealth by historical standards in the Western World, and my guess is, we’ll all continue to be just fine going forward.  What’s a worst case scenario?  Personal income tax rates go up 10%, SIN taxes get raised, and government has to make a few cuts?  That would certainly suck, but we’d still be in better shape that almost everyone else on the planet right?

Lean and Mean = The Rest of the World

Regardless of what our over-analyzed markets will do, the real story here is that the rest of the world is waiting to go through the exact same middle-class consumer explosion that the Western World just experienced.  This rising middle class means that there is still HUGE growth potential in the world.

The BRICS countries (Brazil, Russia, India, China, South Africa) get most of the press, and certainly their massive population, sheer landmass, and natural resource bases will make them increasingly important market-movers going forward.  To focus solely on the BRICS countries (sidenote: Jim O’Neil from Goldman Sachs is responsible for coming up with the term) at the expense of considering the other opportunities for growth on the world market today would be a mistake.

The “N-11” (Next Eleven) countries — Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Turkey, South Korea, and Vietnam may end up being nearly as important as their big BRICS brothers on the international scene. When we consider the sheer size of these respective economies relative to those of the Western World, the potential of growth over the next few decades is absolutely astounding.

The vaunted American consumer base that has been credited with powering the world’s economy since WWII was only about 280 million to 350 million people at any given point.  If even 5-10% of the BRICS or N-11 countries end up turning into American Middle-Class-esque type of consumers, the effect on the supply and demand balance in the economy will be extraordinary.

Sure, things are tough on the world scale right now, but once us “developed” countries get our acts and ledgers together and realize we actually have to pay debt back, I’m willing to bet things will stabilize and growth on a worldwide scale will return.  Take a look at the average incomes in these countries and the trajectory they are headed if you don’t believe me.  The middle class that is developing around the world doesn’t have to mirror our own in order to propel the economy forward.  Look at the at car market in India as an example.  The cars being produced there are not nearly on par with our vehicles, but they are also much cheaper to make, and there is a huge demand for them.  Four people in developing countries earning 10x as much as they used to is much more important than one person in the Western World losing 10% of their wage when you’re considering the worldwide economy.

How Does This Make Me Money?

If you agree that there is growth to be had in the next few decades the only question left is how to profit by it?  Now there are assuredly companies out there in developing nations that you could try to cherry pick in order to get maximum mileage out of the idea.  Of course, these would be notoriously risky, speculative bets, but hey, if you can pick ‘em they’ll make you wealthy.

Personally, I believe that the world is so interconnected these days and companies are so multinational that it doesn’t really matter where the growth takes place, the best companies will know where to find it.  Where can most of the best companies be found?  On the S&P 500!

Calling one company an “American company” and another company a “Brazilian company” is a ridiculous simplification at this point.  While a company’s headquarters might be located in one country (likely where it originated from) it could have marketing branches, production facilities, and retail outlets all over the globe.  When you invest in the S&P 500, you are investing in the world economy, and not merely the American one. This is why I believe that patient investors who simply purchase broad index-based ETFs will be just fine.

Someone will always be paid a lot of money to yell, “This time is different,” only is never has been.  The world’s economy has always kept on chugging along.  While trying to pick the best company, and the most advantageous entry point is a fools game (look at the recent Facebook IPO for further evidence) there is still plenty of money to be made by investing in equities, and investing in solid companies that are well-positioned to make money off of the new rising middle-class around the world.  Ignore the dudes yelling at you through your TV and just use a little common sense, and your nest egg will grow just fine.

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