Two reasons to buy emerging markets

At Emerging Money, we are often asked by investors why they should invest into international markets and specifically, emerging markets (EEM, quote).

Image courtesy Kevin Aurell

Jakarta, Indonesia - a place with relatively low debt and a booming population of workers

In the years ahead, there are a few important factors that are likely to favor developing or emerging markets over developed markets like the United States. 

Two of these factors are: the debt levels of governments and private entities within countries, which affects the ability to sustain economic growth, and demographic trends which will have an influence on the ability of a country to have non-inflationary growth.

Debt levels

The debt-to-GDP ratio in the G20 advanced economies has already exceeded 100% and will exceed 125% in a few years. 

This is the just the tip of the proverbial iceberg. 

In advanced countries such as the United States, the debt of government sponsored entities (GSEs) along with state and local governments is more than double the entire federal debt burden. 

By contrast, levels of public debt are less than one-third of GDP (gross domestic product) in emerging markets. This level is expected to drop to only one-quarter within a few years. 

In addition, unfunded liabilities in the emerging world are very small; household balance sheets are in robust health.

Demographics

Demographics also favor emerging markets for the long term. 

The ratio of retirees to active workers is rising sharply in the developed world. Within two decades, there will be as many non-workers as workers in many developed countries such as Japan and Western Europe. 

This demographic will combine with high debt levels to reduce economic growth and increase the burden on entitlement spending. 

Meanwhile in much of the developing world, the ratio of non-workers to workers will remain steady or fall over the next 20 years. Even in China, with its one-child policy, the ratio will remain below 30% in the next two decades.

The years ahead

Debt and demographics have already led to a significant shift in the growth of different economies around the globe. 

Developed countries with high debt levels and aging populations are experiencing slow economic growth while developing countries with low debt levels and a young population are experiencing fast economic growth. 

Many stocks located in these emerging markets, therefore, will benefit relative to those in the advanced economies and offer excellent investment opportunities.