Monday, July 22, 2013

A Few Ways to Play This Emerging Market

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While the emerging markets have been a turbulent place for capital investment over the last few months, the longer-term growth potential for many of these countries remains intact.
I previously published a post where I discussed a variety of exchange traded vehicles for exposure to India specifically. While India has struggled greatly in comparison to China, the country does still house a huge proportion of the world's population.
According to current estimates, the country is home to over 1.24 billion people, or 17.5% of the current global population. Up to today, the country's true potential has been hindered by numerous headwinds, including political corruption, famine, low wages, and poor manufacturing in comparison to its Asia Pacific counterparts.
The sheer number of people within the country makes it an attractive market for our leading companies. While I, nor any economist, can predict the timing of the eventual turnaround within the country, I do want to highlight a few companies positioning themselves for the future ahead.

Coffee craze
A global leader in coffee, Starbucks (NASDAQ: SBUX) , has positioned itself well through strategic partnerships to penetrate India over the next decade. The company, in partnership with Tata Beverages, plans to expand to a variety of major cities in an attempt to take advantage of the 25% yearly growth rate in coffee in India. While coffee demand from India only represents 1.4% of total coffee demand today, some market analysts have predicted a huge jump in the near future.
For decades, the country has typically relied on Tea, but increasing urbanization and trends have pushed consumers to coffee. By offering its customers free internet access, the company has reportedly been very successful with the younger generation. At this time, profits may not be as important as establishing relevance. We have seen what happened when Starbucks asserted its dominance within China, total control and pricing power.
In India, Starbucks has priced its offering below its major competitors and as a result, its consumers have tended to go for the lowest priced offerings. Similar to the whole lower priced iPhone strategy, I feel over time, as incomes rise, the company can transition these customers into the full array of drink offerings.
However, Starbucks may not be the only coffee conglomerate looking to become relevant within the country. Dunkin' Brands Group (NASDAQ: DNKN) , the parent company of everyone's favorite doughnut company, Dunkin' Donuts, is looking to expand within India. As I discussed briefly before, Dunkin's selection of food offerings and pastries greatly outperforms its competitors at every level as far as I'm concerned. A focus on innovation has helped the company differentiate itself within the very competitive coffee business.
Stan Frankenthaler, executive chef, has been the brain behind the 70 new products which have hit markets within the last year, including the world renowned Glazed Donut breakfast sandwich. The company has worked hard to tailor its menu to the specific tastes of the Indian consumer. By incorporating India's staples, such as the mango, into its traditional products, it has established its reputation as an all day quick service restaurant.
As of today, management has estimated its product backlog has reached nearly two years, personally I can't wait to see what comes next. Going forward, I would expect the company to further cement its presence within the region to assure its relevance when the tides do begin to turn.
Broad exposure
Perhaps, you are one of the many investors looking to easily diversify your portfolio through exchange-traded funds. If you are, you should check out the WisdomTree India Earnings Fund (ETF) (NYSEMKT: EPI) for a spread approach. The fund is heavily weighted in financials, materials, and industries, which bodes well for a trend of increasing infrastructure within the country.
The financial sector, in particular, should benefit as incomes begin to rise and a greater number of India's huge population gains access to banking and loan services. The materials and infrastructure sectors should do well going forward as the majority of Indians lives without even the basic infrastructure of most developing countries
Wrap up
While India has been plagued with numerous headwinds over the last decade, the potential within the country remains as high as its has every been. With the second-largest population, consumer discretionary names such Starbucks and Dunkin' should do well as incomes rise. The WisdomTree India Fund mentioned above offers investors a broad vehicle for exposure to the country.

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