The growth outlook in a low-growth world

Over the past year, global growth forecasts have fallen, especially for developed econ-omies burdened with fiscal deficits. Europe, the U.S. and Japan have serious debt issues and likely will cut public spending, which would further affect growth. Meanwhile, the developed-market corporate-earnings outlook, while still relatively robust, also has deteriorated.

For equity investors seeking growth, this combination poses significant challenges.

We foresee moderating but durable growth in emerging markets that is likely to outpace growth in developed markets. In many cases, emerging markets have been grappling with the enviable problems stemming from high growth.

Some skepticism is warranted when it comes to many developed-country consumer holdings, whose fortunes depend on healthy domestic growth rates. Nevertheless, compelling opportunities remain for growth-oriented investors in both the developed and developing worlds.

This is particularly true for those who employ bottom-up research to identify fundamentally attractive stocks that markets have temporarily misplaced.

Specifically, four investing themes stand out:

E-commerce. Over the past decade, the compounded annual growth rate of U.S. e-commerce revenue has been 18.9%, versus a 3.1% rate for all U.S. retail sales. At the same time, e-commerce accounts for less than 5% of overall sales. Some areas — books, travel and consumer electronics — are crowded and competitive, but others — apparel, accessories and household products — remain highly attractive.

Communications and computing. Handset sales are no longer an area of high growth, but smartphone demand is accelerating and that is expected to continue for several years. In the personal-computing market, the same gap has opened up between the soaring sales of tablets and the slow sales of PCs. In this area of investing, the disruptive impact of new technologies puts an increased emphasis on fundamental research to identify potential winners and losers.

Emerging-market consumers. The numbers are startling. The number of people in the BRIC nations (Brazil, Russia, India and China) with annual incomes of at least $6,000 will grow by 70% over the next decade. From 2003 to 2010, the average annual income of Chinese workers grew by 35% a year.

In Brazil, the number of middle- and upper-class consumers has grown by about 50% since 2005.

More than a third of global gross domestic product in nominal terms now comes from emerging markets, and their share is expected to surpass 50% over the next decade. Emerging markets already account for a larger share of global consumption than the United States.

Continued growth in the number of middle-class consumers around the world should drive global demand deep into the 21st century. And developed-world multinationals with strong consumer brands, such as certain luxury-goods producers, are particularly well positioned to benefit.

Emerging financials. In sharp contrast to the troubled financial institutions in the developed markets, emerging-markets banks are generally well capitalized and asset quality is high. Leverage in emerging market households still is extremely low.

But as savings rates have declined and consumption spending has increased, demand for mortgage and consumer credit services in many countries has grown off a relatively low base at a 20% clip. Moreover, interest rates are higher than in the developed world, and credit quality is good because of low unemployment.

Keep in mind that banks are essentially leveraged plays on their underlying economies. Loan growth, for example, tends to be a function of GDP growth. If you look back over long periods of history, operating a bank in healthy, growing economies has been a pretty good business. As a result, attractive financial sector opportunities can be found in a wide range of developing nations, including Brazil, India, Thailand, Indonesia and Turkey. These pockets of dynamic change contrast sharply with the serious issues at the macroeconomic level that challenge aggregate global GDP growth.

Whether in high-end products in developed markets or financial institutions in emerging markets, the evolving global marketplace continues to foster high-quality companies that can prosper even during these turbulent times. The changes are so rapid, however, that intensive fundamental research is the key to identifying these attractive opportunities.

Scott Berg is a vice president of T. Rowe Price Group Inc. and portfolio manager of the T. Rowe Price Global Large-Cap Stock Fund.

Related Topics: Investment Strategies