MONEY stocks

China’s Boom Is Over — and Here’s What You Can Do About It

Illustration of Chinese dragon as snail
Edel Rodriguez

The powerhouse that seemed ready to propel the global economy for decades is now stuck in a period of slowing growth. Here’s what that means for your portfolio

Every so often an investment theme comes along that seems so big and compelling that you feel it can’t be ignored. This happened in the 1980s with Japanese stocks. It happened again with the Internet boom of the 1990s. You know how those ended.

Today history appears to be repeating itself in China.

Just a decade ago, China was hailed as the engine that would single-handedly drive the global economy for years to come. That seemed plausible, as a billion Chinese attempted something never before accomplished: tran­sitioning from an agrarian to an industrial to a consumer economy, all in a single generation.

Recently, however, this ride to prosperity has hit the skids. A real estate bubble threatens to crimp consumer wealth; over-investment in a wide range of industries is likely to dampen growth; and the transition to a developed economy is stuck in an awkward phase that has trapped other emerging markets.

No wonder Chinese equities—despite a strong rebound last year—are down around half from their 2007 peak.

iSCH1

Like the Japan and dotcom manias before it, China looks like an old story. “Do you have to be in China?” asks Henrik Strabo, head of international investments for Rainier Investment Management in Seattle. “The truth is, no.”

If you’ve bought the China story—and since 2000 hundreds of thousands of U.S. investors have plowed $176 billion into emerging-markets mutual and exchange-traded funds, which have big stakes in China—that’s a pretty bold statement.

In fact, even if you haven’t invested directly in Chinese stocks and simply hold a broad-based international equity fund, China’s Great Slowdown has an impact on how you should think about your portfolio. Here’s what you need to understand about China’s next chapter.

China Has Hit More Than a Speed Bump

After expanding at an annual clip of more than 10% a decade ago, China’s economy has slowed, growing at just over 7% in 2014. That’s expected to fall to 6.5% in the next couple of years, according to economists at UBS. And then it’s “on to 5% and below over the coming decade,” says Jeffrey Kleintop, chief global investment strategist at Charles Schwab.

Why is this worrisome when gross domestic product in the U.S. is expanding at a much slower 3%?

For starters, it represents a steep drop from prior expectations. As recently as three years ago, economists had been forecasting that China would still be growing at roughly an 8% clip by 2016.

The bigger worry is that the slowdown means that China has reached a phase that frustrates many emerging economies on the path to becoming fully “developed,” a stage some economists refer to as the middle-income trap.

On the one hand, a growing number of Chinese are approaching middle-class status, which means wages are on the rise. That sounds good, but rising labor costs chip away at China’s competitive advantage in older, industrial sectors. “You’re seeing more and more manufacturers look at other, cheaper markets like Indonesia, Vietnam, and the Philippines,” says Eric Moffett, manager of the T. Rowe Price Asia Opportunities Fund.

At the same time, the country’s new consumer-centric economy has yet to fully form. About half of China’s urban population is thought to be middle-class by that nation’s standards, but half of Chinese still live in the countryside, and the vast majority of those households are poor. Couple this with the deteriorating housing market—which accounts for the bulk of the wealth for the middle class—and you can see why China isn’t able to buy its way to prosperity just yet.

This in-between stage is when fast-growing economies typically downshift significantly. After prolonged periods of “supercharged” expansion, these economies tend to suffer through years when they regress to a more typical rate of global growth, according to a recent paper by Harvard professors Lawrence Summers and Lant Pritchett.

In some cases, like Brazil, this slowdown prevents the economy from taking that final step to advanced status. Brazil had been expanding 5.2% a year from 1967 to 1980, but that growth slowed to less than 1% annually from 1981 to 2002.

No one is saying China will be stuck in this trap for a generation, like Brazil, but China could be looking at a long-term growth rate closer to 4% to 5% than 8% to 10%.

iSCH2

Your best strategy: Go where the growth is—at home. A few years ago the global economy was ex­pected to expand at an annual pace of 4.2% in 2015, trouncing the U.S.  Today the forecast is down to 3.1%, pretty much the same pace as the U.S. economy, which is expected to keep accelerating through 2017.

In recent years, some market strategists and financial planners have instructed investors to keep as much as 40% to 50% of their stocks in foreign funds. But ­dropping that allocation to 20% to 30% still gives you most of the diversification benefit of owning non-U.S. stocks.

The Losers Aren’t Just in Asia

China’s rise to power lifted the fortunes of its neighboring trade partners too, so it stands to reason that a broad swath of the emerging markets is now at risk. “China is still the beating heart of Asia and the emerging markets,” says Moffett. “If it slows down, all the other countries exporting to and importing from China will see their growth prospects affected.”

The country’s biggest trading partners in the region are Hong Kong, Japan, South Korea, and Taiwan, and all are slowing down. Economists forecast that the growth rates in those four nations will slip below 3% next year.

Beyond Asia, “you have to be careful with the commodity exporters,” says Rainier’s Strabo. China’s slowdown over the past five years is a big reason commodity prices in general and oil specifically have sunk more than 50% since 2011.

China consumes about 40% of the world’s copper and 11% of its oil. As the country’s appetite for commodities wanes, natural resource producers such as Australia, Russia, and Latin America will feel the blow.

Your best strategy: Keep your emerging-markets stake to around 5% of your total portfolio. If your only foreign exposure is a total international equity fund, then you’re probably already there. If, however, you’ve tacked on an emerging-markets “tilt” to your portfolio to try to boost returns, unwind those positions, starting with funds focusing on Asia, Latin America, or Russia.

Here’s another bet that’s now played out: A popular strategy in the global slowdown was to take fliers on Western companies with the biggest exposure to China—companies such as the British spirits maker Diageo (think Johnnie Walker and Guinness) and Yum Brands (KFC and Pizza Hut)—solely because of their China reach. And for a while, that paid off.

Now, though, the stocks of Yum and Diageo have stalled, and major global companies such as Anheuser-Busch InBev and Unilever have reported disappointing results recently in part owing to subpar sales in China as well as in other emerging markets.

Demographic Problems Will Only Make Things Worse

For years, China’s sheer size was seen as a massive competitive advantage. Indeed, China has three times as many workers as the United States has people.

Yet as the country’s older workers have been retiring, China’s working-age population has been quietly shrinking in recent years. Economists say this will most likely lead to labor shortages over the coming years, putting even more pressure on wages to rise.

iSCH3

China’s demographic problem has been exacerbated by the country’s “one-child” policy, which has prevented an estimated 400 million births since 1979. But China isn’t the only emerging market suffering from bad demographic trends.

Birthrates are low throughout East Asia. The ratio of people 15 to 64 to those 65 and older will plummet from about 7 to 1 to 3 to 1 in the next 15 years in Taiwan, South Korea, and Hong Kong, dragging down growth.

Your best strategy: If you’re a growth-focused investor who wants more than that 5% stake in emerging markets, concentrate on developing economies with more youthful populations and more potential to expand. One fund that gives you that—with big holdings in the Philippines, Saudi Arabia, Egypt, and Colombia—is Harding Loevner Frontier Emerging Markets . Over the past five years, the fund has gained around 7% a year, more than triple the return of the typical emerging-markets portfolio.

Another option is EGShares ­Beyond BRICs . Rather than investing in the emerging markets’ old-guard leaders—Brazil, Russia, India, and China—this ETF counts firms from more consumer-driven economies, such as Mexico and Malaysia, among its top holdings.

The Parallels Between China and 1990s Japan are Alarming

For starters, China is facing a real estate crisis similar to Japan’s, says Nariman Behravesh, chief economist at IHS. With easy access to cheap credit, developers have flooded the major cities with excess housing. Floor space per urban resident has grown to 40 square meters, compared with just 35 square meters in Japan and 33 in the U.K.

Not surprisingly, prices in 100 top Chinese cities have been sliding for seven months. Whether China’s property bubble bursts or not, falling home values chip away at household net worth; that, in turn, drags down consumer sen­timent and spending, Behravesh says.

Other unfortunate similarities between the two nations: Excess capacity plagues numerous sectors of China’s economy, ranging from steel to chemicals to an auto industry made up of 96 car­ brands.

Also, Chinese officials face political pressure to focus on short-term growth rather than long-term fixes. This type of thinking has resulted in the rise of so-called zombie companies, much like what Japan saw in the ’90s. “These are companies that aren’t really viable but are being kept alive,” Behravesh says. Yet for the economy to get back on track, inefficiently run businesses have to be allowed to fail, market strategists say.

Your best strategy: Focus on the few major differences between the two countries. Unlike Japan, for instance, China is still a young, emerging economy. Slowdown or not, “the growth of the middle class will continue in China, and that will absorb some of the overhang in the economy, which is something Japan couldn’t count on,” says Michael Kass, manager of Baron Emerging Markets Fund.

What’s more, when Japan’s bubble burst in late 1989, stocks in that country were trading at a frothy price/earnings ratio of around 50. By contrast, Chinese shares trade at a reasonable P/E of around 10.

To be sure, not all Chinese stocks enjoy such low valuations. As competition heats up to supply China’s population with basic goods, valuations on consumer staples companies have nearly doubled over the past four years to a P/E of around 27.

At the same time, the loss of faith in the Chinese story means there are decent values in industries that cater to the established middle and upper-middle class, says Nick Niziolek, co-manager of the Calamos Evolving World Growth Fund. Health care and gaming stocks in particular suffered setbacks last year. And Chinese consumer discretionary stocks are trading at a P/E of just 12, down from 20 five years ago.

You can invest in such businesses through EGShares Emerging Markets Domestic Demand ETF EGA EMERGING GLOBA EGSHARES EMERGING MKTS DOME EMDD 0.79% , which owns shares of companies that cater to local buyers within their home countries, rather than relying on exports. Chinese shares represent about 17% of the fund, led by names such as China Mobile.

That one of the world’s great growth stories is now best viewed as a place to pick up stocks on the cheap might seem a strange twist—until you remember your Japanese and Internet history.

MONEY energy

3 Ways to Profit from Falling Oil Prices

Fortune Teller's ball with oil sloshing inside
Gregory Reid

Stagnant global demand and increased supply has pushed oil to its lowest price since 2009. Here's how savvy investors can take advantage.

Big jolts to energy prices are often caused by major economic imbalances—like rising tensions in the Middle East setting off supply scares. Or a dropoff in demand from a recession, causing prices to plummet.

This time there is no global crisis behind crude’s slide (from $105 a barrel in the summer to around $60 recently, its lowest level since 2009). Instead to blame: fresh worries about growth in Europe, Japan, and China, set against rising production in Saudi Arabia, Russia, Libya, and the U.S.

Don’t expect producers to turn off the spigot just yet, especially in the U.S., where the burgeoning fracking industry can still profit at lower prices. Analysts at Goldman Sachs predict output and use will both grow in 2015, but supply will outpace demand. That should push oil down further. Here’s how you can protect your portfolio and profit from the oil glut.

Your Action Plan

Ease off emerging markets. Russia and Iran need oil at or above $100 a barrel to avoid major budget deficits, says Matthew Berler, CEO of investment firm Osterweis. The Saudis have been playing hardball by refusing to cut production, and if they continue, “other parts of the emerging markets could get hit,” says Tom Forester, head of Forester Capital Management. Good reason to cut emerging markets to 5% of your portfolio.

Bet on shipping. With gas expected to stay 30¢ a gallon below 2014 highs, “the transportation industry is getting a big windfall,” says economist Edward Yardeni. Railroad stocks have been on a tear for years. So lean toward cheaper truckers and airlines, which benefit from sinking prices and rising spending. Two-thirds of SPDR S&P Transportation ETF is in those industries.

Save on a gas sipper. “When gas prices go down, you see an immediate impact on vehicle choice,” says John Krafcik, president of pricing site TrueCar. Automakers have already begun discounting super-fuel-­efficient cars—the Ford Focus Electric recently fell $6,000—and Krafcik expects to soon see “fantastic deals” on gas-engine midsize and compact sedans, which can get 30-plus mpg. Everyone else may be buying big—the SUV is back!—but a contrarian play may pay off in the long haul.

 

MONEY Markets

Here’s How Anyone Can Beat Professional Investors

141110_INV_PassiveInvesting
Herbert Gehr—Getty Images/Time & Life Picture With cheap index funds, you can diversify without paying a premium.

Statistically speaking, financial experts still can't match the "wisdom of the crowd."

Another day, another piece of evidence that active fund managers are no better at investing than lab rats.

This time, researchers at Bank of America found that more than 4 out of 5 managers have failed to beat the Russell 1000 index of large-company stocks so far this year. In fact, there’s been only one year in the last decade (2007) when a majority of active managers beat the market.

“It’s an incredibly competitive environment, with so many active managers looking for the next great investment, and it’s just not there,” says Alexander Dyck, a finance professor at University of Toronto’s Rotman School of Management, who has co-authored an international comparison of active and passive strategies.

Dyck’s research found that in the United States, passive strategies work better than active management. That is, mutual funds that simply mimic an index actually return more money, post-fees, than funds managed by professionals making hands-on choices about what stocks, bonds, and other assets to hold.

That finding is a big deal because people who invest in active funds—say, in their 401(k)s or other retirement accounts—typically pay much higher fees than those who invest in passive funds. Thanks to active management, stock fund investors on average end up paying more than five times as much in expenses than they would with index funds; that can amount to tens of thousands of dollars, as the chart below shows.

Screen Shot 2014-11-11 at 4.54.47 PM (2)
Source: https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-cost

When active funds do beat their benchmarks, that can make up for high fees (though evidence suggests even that scenario is rare). But with most returns so uninspiring, there doesn’t seem to be much remaining justification for active management, at least for the average investor. Better to stick with cheap index funds.

Of course, there are exceptions to this rule. Dyck’s research, for example, found that active managers can still beat their benchmarks when they invest overseas—particularly in emerging markets like China, where investing in companies hand-picked by a professional tends to be a better bet than investing in a basket of stocks representing every company out there.

“In countries with significant governance risks, a plain old index gives you exposure to everything, including the good, the bad, and the ugly,” says Dyck.

But even though active investing outside of the U.S. seems to work for institutional investors who generally pay lower fees, Dyck says, it doesn’t mean it’ll be worth it for you. As a retail investor, you’ll almost always pay more than the professionals.

TIME Companies

Meet the Woman Heading Facebook’s Huge International Growth

Key Speakers At The Dublin Web Summit
Aidan Crawley—Bloomberg/Getty Images Nicola Mendelsohn, vice president for EMEA at Facebook Inc., gestures as she addresses delegates during the Dublin Web Summit in Dublin on Oct. 30, 2013.

Like many of the U.S. tech giants, Facebook is increasingly betting its financial future overseas. The company, whose social network has already achieved widespread adoption in North America and Western Europe, is focusing more of its resources on fast-developing markets like Africa, the Middle East and India. In April Facebook announced that it had 100 million users in India, and it reached the same milestone in Africa in September.

The company is trying to get more people in these regions online through its Internet.org initiative, which aims to beam Internet connectivity to remote areas. At the same time Facebook is courting marketers by offering up region-specific advertising units that are tailored to the different ways people communicate around the world.

During New York’s Advertising Week, TIME sat down with Nicola Mendelsohn, Facebook’s Vice President for Europe, the Middle East and Africa, to discuss the growth of Facebook’s business abroad, how privacy concerns differ across cultures and whether Yo isn’t such a crazy app idea after all.

TIME: Obviously Facebook’s mobile transition has been a big story the past couple of years. But here when people think about it, they think of smartphones. Was Facebook’s feature phone business one that happened after smartphones or was it happening concurrently?

Mendelsohn: Two thirds of the world are accessing Facebook through feature phones, so it’s a hugely important part of how people access the platform. What we’re trying to do is make the world more open and connected so people can share more. Mobile means many different things depending on where on the planet you are and how you access Facebook and the Internet.

We’ve made a change in how we go to market in terms of our advertising products. It used to be that we had exactly the same advertising product all around the world. We’ve now started to place more and more resources in the developing markets, like Africa, like India, like Indonesia, to really understand how people are using Facebook, how they’re using mobile and come up with different products that work better there.

One is an insight borne out of what we saw in India. Data is expensive, and for a lot of people it can be prohibitive in terms of how they access Facebook or the Internet. What we saw was a whole “missed calls” phenomenon that was going on. Between us we’d create our own language—one missed call means go pick the kids up, two means let’s meet for a drink, three means I’ll meet you for lunch or whatever it is. We set up the missed call product so that advertisers could have the opportunity to tap into this meme and deliver information to people, some of whom are coming onto the Internet and to Facebook for the very first time and who are actually really excited to get messaging from advertisers. That’s the first place that we’ve done this, and the results are such that we’re going to look to do this in South Africa as well.

TIME: You just mentioned that a lot of people in these markets might be excited about seeing advertising because they haven’t been exposed to the Internet as much. Is the appetite for ads there higher than in America, where people are exposed to ads all the time?

Mendelsohn: People like advertising if it’s relevant and entertaining and useful to them. What we see in some of the high-growth markets is that brands are talking to them for the very first time, and there is an excitement about that because it’s new and it has not happened before. We see behaviors where people actually share the adverts that they see with other people because it’s of interest and it’s new information.

TIME: Out of that 100 million users in Africa, which are the countries you are most focused on?

A: That’s Nigeria, Kenya, South Africa.

TIME: Do you expect, going forward, that the feature phone market is going to increase, or do you see with Android One and these cheaper smartphones that people are going to transition to those devices really quickly?

I think there will be an acceleration of these cheaper smartphones, driven in particular by the price. But I think they’re not going to have all the same features that the ones we have in the U.S. and the U.K. have. There will still be challenges on things like data costs. Actually the challenge becomes greater when you have the smartphone because it has access to so many more bells, gadgets, widgets. If you want to connect the planet, data and cost is something that is prohibitive to that. It’s one of the reasons that Mark Zuckerberg launched Internet.org.

TIME: Facebook’s average revenue generated per user is much lower in these emerging markets than it is in the U.S. What is Facebook’s plan to boost that number in the future?

What is the primary concern in this part of the world is how we connect everyone to the Internet. That’s the primary focus. In terms of the ARPU, that will emerge in different ways.

TIME: You’re dealing with a lot of different types of cultures across a vast number of countries. Do you see different privacy concerns in different areas? How do you deal with that on an individual basis?

For us, privacy is the most important issue and making sure that people know and are in control of the data they share and who they share it with. I think that’s important for people wherever you are the world. One of the nuanced differences that we see in some of these countries is the fact that people like to be friends with lots more people than perhaps they might in mainland Europe. We see people want to have lots of friends, including people that they’ve never never before, and share information with those people. That is a difference that might sit uncomfortably with other people in different parts of the world.

TIME: Are you familiar with the app Yo?

No, I’m not. Tell me about Yo.

TIME: All it does is send the word Yo to other people. It was actually pretty heavily mocked when it came out over the summer. But it sounds like from what you’re saying that’s a logical use case that actually exists, where people would want to send a single word that can provide context about what they’re doing.

I can’t talk to [Yo], but I think people communicate in different ways. The uptake in stickers—people sending emoticons just to express their feelings—is a different way of showing how people communicate. Not necessarily in Africa but in some of the more developed markets. People are becoming much more visual.

We’ve always seen with any new technology that’s come on since the printing press, that it causes people to think about how they communicate in different ways. One of the things that’s been surprising about this technology revolution is that it’s shortened some of the ways that we communicate with each other rather than increasing it. If the printing press meant that we could write canon of books, the mobile phone means I can write “LOL” and we both understand what that means.

MONEY Emerging Markets

Why Stocks in Brazil, Russia, and China are Still Sinking Like a BRIC

With the exception of India, the emerging market's biggest economies are struggling to get back into gear.

Last month’s elections in India kindled hope for reform in the world’s biggest democracy and provided the nation’s stock market with a nice bump.

One thing it couldn’t do is rescue the so-called BRIC funds, which are foreign stock portfolios that target the emerging market’s most influential economies — Brazil, Russia, India, and China. The term “BRIC” was coined in 2001, by then-Goldman Sachs economist Jim O’Neill. During the last decade, when emerging markets rallied, the BRIC story captured investors’ imaginations.

Goldman Sachs, Franklin Templeton, iShares and others rolled out BRIC funds. At their peak in 2010, these investments held more than $4 billion.

But since then performance has tanked.

^SSBR Chart

^SSBR data by YCharts

Over the past five years the Goldman Sachs BRIC Fund GOLDMAN SACHS BRIC A GBRAX 2.08% version ranks in the 92nd percentile among emerging markets funds, Templeton BRIC TEMPLETON BRIC A TABRX 1.68% ranks in the 99th and the iShares MSCI BRIC ISHARES INC MCSI BRIC INDEX FUND BKF 3.25% , an ETF, ranks in the 100th. Today investors have just $1.4 billion invested in BRIC funds, according to Morningstar. (The companies didn’t respond to calls for comment by press time.)

What happened?

The story is largely tied to China, which makes up roughly half the market value of BRIC stocks. The world’s second largest economy is no longer growing at a double-digit annual clip. And as a result of financial-crisis-era stimulus, has been dealing with inflation, a housing bubble and declining manufacturing.

Source: MSCI

 

Meanwhile Brazil’s once promising middle-class consumers seem over-extended (casting a cloud over its lavish World Cup spending.)

And as for Russia, well, there was Vladimir Putin’s annexation of Crimea and threats against Ukraine. Enough said.

The lesson for investors isn’t to abandon emerging markets altogether. As a group, these economies will continue to gain ground on the developing world. But the emerging markets themselves are evolving and maturing. No longer can you get away by betting simply on the biggest players.

Investors, in fact, might fare better in a more diversified emerging markets index fund, like Vanguard Emerging Markets Index Fund VANGUARD EMERGING MARKETS STOCK IDX INV VEIEX 1.62% with exposure to many more emerging economies than just these four. It sounds counterintuitive, but investing in a fund that mixes in smaller (and possibly less economically stable) countries like Indonesia or Thailand might reduce the overall volatility of a foreign stock portfolio that focuses just on the big four BRICs.

Plus, companies in those markets are apt to grow just as fast if not faster than their Chinese or Brazilian counterparts.

MONEY Emerging Markets

Why India’s Stock Market is Soaring

While equities in Brazil, Russia, and China continue to sink like BRICS, India's market and economy are on the road to recovery.

Although the world’s largest democracy has been hobbled by inflation, a declining currency, sub-par growth and difficult business environment, the pro-business Bharatiya Janata Party that just won an epic election in India has engendered optimism that the country can turn around its sagging economic scenario.

It’s time to increase your exposure to India’s stock market.

India’s equity market has been perking up of late, something that can’t be said for the other so-called “BRIC” economies of Brazil, Russia and China, which collectively make up nearly half of the market value of the emerging markets.

^SINU Chart

^SINU data by YCharts

The $1.3 billion WisdomTree India Earnings ETF WISDOMTREE TRUST INDIA EARNINGS FUND EPI 2.24% , the largest exchange-traded fund investing in Indian stocks, has climbed 22% over the past 12 months through May 29 and is up 26% year-to-date. The fund holds large companies such as Reliance Industries and Tata Motors. It charges annual expenses of 0.83% of assets.

For a play on smaller Indian companies, consider the Market Vectors India Small-Cap ETF MARKET VECTORS ETF INDIA SMALL-CAP INDEX ETF N SCIF 3.72% , up nearly 31% over the past 12 months and nearly 46% year-to-date. It spots an expense ratio of 0.93% holds stocks such as Ramco Cements and Hexaware Technologies.

Before digging in too deeply, be aware of the risks of investing in India.

* The bureaucratic business environment is tough to navigate, as well as corrupt.

* Stocks listed on Indian exchanges are volatile and will continue to be. The WisdomTree fund’s returns, for example, have been all over the board. After climbing 95% and 20% in 2009 and 2010, respectively, the fund lost 40% in 2011 and 9% last year. This is a reason India shouldn’t dominate your global stock holdings, but represent a “satellite” position that includes other emerging economies.

* The Indian economy is still sluggish relative to its historic standards. In the last fiscal year, economic growth slowed to a 10-year low of 4.5% from a high of 10.4% in 2010, according to The World Bank. If new Prime Minister Narendra Modi can pull off a turnaround, demand will increase for banking services and credit, construction, consumer goods, and vehicles. The Modi-led BJP government may also ramp up trade with China and other growing Asian economies.

* Inflation, hovering around 10%, continues to hamper the Indian economy. The central bank has raised interest rates three times since September 2013. Along with a pronounced drop in the rupee against the U.S. dollar, the country has been stung by the U.S. Federal Reserve’s pullback on its bond-buying stimulus, which had pumped billions into developing nations like India.

Neena Mishra, director of ETF Research for Zacks Investments in Chicago, sees India as a good long-term investment since renowned economist Raghuram Rajan took over as the governor of the central bank of India.

“The central bank has taken a number of positive steps in the past few months, towards bringing down inflation, liberalizing financial markets and strengthening the monetary policy framework,” Mishra says.

Although tangible economic progress seems slow to investors in the West, India’s development and social progress is largely a success story that will accelerate if economic growth picks up.

Growth is expected to increase to nearly 5% in the most recent fiscal year; to almost 6% in the 2014-2015 fiscal year; and 6.5% the following year. If those forecasts prove true, India would trail only China as the largest and fastest-growing developing country.

TIME

That’s-a No Longer My Sauce! Ragu and Bertolli Being Sold for $2.15 billion

Unilever Said to Seek Up to $2 Billion in Ragu Sauce Sale
Daniel Acker—Bloomberg/Getty Images Unilever's Ragu brand pasta sauce sits on display in a supermarket in Princeton, Illinois, U.S., on Tuesday, March 4, 2014.

Unilever sold the two American brands to Japanese condiments giant Mizkan Group, as the Anglo-Dutch conglomerate sharpens its attention on emerging markets

Unilever announced Thursday that it would sell its North American pasta sauce brands, Ragu and Bertolli, to Japanese condiments company Mizkan Group for $2.15 billion.

The deal will transfer ownership of two processing plants in the U.S., one in Owensboro, Kentucky and the other in Stockton, California, to the Japanese condiments giant.

Mizkan’s chairman Kazuhide Nakano called the deal “an important milestone in our global expansion strategy.” The company has a growing stake in North American markets, with the acquisition of World Harbors, a U.S. brand of BBQ sauce and marinades, in 2010 and Border Foods Inc., a U.S. based processor of jalapeño peppers, in 2012.

British-Dutch conglomerate Unilever, meanwhile, has shifted its focus toward emerging markets, where it plans to ramp up sales in higher-margin personal care products.

Kees Kruythoff, president of Unilever North America said in a statement, “This sale represents one of the final steps in reshaping our portfolio in North America to deliver sustainable growth for Unilever, and enables us to sharpen our focus within our foods business.”

 

TIME Nintendo

Nintendo Planning ‘Completely New’ Systems for Emerging Markets

The company's planning to dive into the figurine market dominated by Skylanders and Disney Infinity, too

On the heels of alarming fiscal figures and plummeting Wii U sales, Nintendo says it plans to design and market entirely new game systems which it hopes to sell in emerging markets, Bloomberg reports.

The idea, Nintendo president Satoru Iwata revealed in a new interview, is to bring new gaming concepts to those markets instead of following competitors’ leads and selling less expensive versions of existing platforms.

“We want to make new things, with new thinking rather than a cheaper version of what we currently have,” said Iwata. “The product and price balance must be made from scratch.”

Iwata also indicated that Nintendo hopes to make headway in the highly popular figurine market, currently dominated by Activision’s Skylanders and Disney’s Infinity series, by selling figures based on Nintendo’s stable of iconic characters, like Mario, Zelda and Donkey Kong. The figurines would communicate with Nintendo’s devices using the near field communications (NFC) technology used by the company’s Wii U games console.Nintendo recently announced an NFC device for its portable 3DS system that allows gamers to scan objects with the device and transfer them to the Wii U.

Under pressure by analysts and pundits to engage the smart device market, Iwata also reiterated Nintendo’s position on smartphones. “We have had a console business for 30 years, and I don’t think we can just transfer that over onto a smartphone model,” he said. Iwata also expressed concern that trying to sell games designed for smartphones might harm other aspects of Nintendo’s business, adding that depending on revenue from smart devices “cannot be a pillar” for the company.

[Bloomberg]

MORE: The History of Video Game Consoles – Full

MONEY Investing

Emerging Markets that Merit a Closer Look

Dhiraj Singh / Bloomberg / Getty Images Pedestrians walk past a Citibank branch in Mumbai

Emerging economies have tumbled in unison, yet some have far better prospects than others

The best time to buy something is when it’s on sale.

The place to look for stock bargains may finally be among developing economies, where share prices collectively are down 17% from their recent spring 2011 peak and stocks are trading at an average price/earnings ratio of 10.7 — a 40% discount to shares of developed nations.

Notes Jeff Shen, head of emerging markets at BlackRock: “That’s about the widest spread in more than 15 years.”

True, with risks rising abroad, there are reasons developing-nation stocks are so cheap. China’s growth is slowing, Brazil faces deficits, Russia just annexed Crimea — the list goes on. And as the Federal Reserve tapers bond purchases, global credit is shrinking, which hurts smaller countries dependent on foreign investment.

For those with a discerning eye, however, the recent selloff could spell opportunity.

“Emerging-market nations are no longer monolithic, and some are in pretty good shape,” says T. Rowe Price emerging-markets specialist Todd Henry.

He expects these healthier economies to spur the benchmark MSCI Emerging Markets Index to deliver 11.5% earnings growth in 2014 — more than two percentage points higher than the forecast for the S&P 500 index.

The following strategy will help you identify the most promising areas, while limiting your risks.

Look under the hood

Three trends seem likely to move emerging markets this year:

Asia will deliver solid growth. As China shifts from an economy propelled by exports to one driven by domestic consumption, its expansion is slowing. Yet concerns about stagnation seem overblown, given forecasts for a 7.5% rise in GDP in 2014.

“That’s more than twice as fast as developed nations,” says Justin Leverenz, manager of Oppenheimer Developing Markets, which has a 19% stake in China. Even if China stumbles, Taiwan and South Korea look strong.

“These countries have big current-account surpluses, as well as global trade that isn’t dependent on China,” says Arjun Jayaraman, co-manager of Causeway Emerging Markets.

Scary markets will stay scary. Case in point: Russia, where stocks have fallen 17% this year. Even before the Crimean crisis, Russia’s economy was in a slump, partly from political uncertainty.

“Disruption goes with the emerging-market territory,” says Craig Shaw, co-lead manager of Harding Loevner Emerging Markets. Shaw is sticking with a 6% stake in Russia.

Emerging markets do often rebound sharply before their economies recover. Over the past year, for example, stock prices in Greece, which was demoted to emerging-market status last fall, have jumped 52%, even though its debt problems aren’t resolved. Whether those gains are sustainable if there’s no progress soon is another question.

Think smaller for bigger gains. The least-developed emerging economies — so-called frontier markets, such as Ghana, Estonia, and Vietnam — tend to perform differently from more established markets.

Over the past year, for instance, the MSCI Frontier Index has risen 22.6%. The challenge: It can be tough to get in on the action since these shares tend to be thinly traded and most emerging-markets funds hold only a small stake.

Fine tune with two funds

Given the risks, “most people should put no more than 5% of their overall portfolio into emerging markets,” says Chicago financial planner Mary Deshong-Kinkelaar.

Start with a diversified fund that gives you exposure to all these countries, but maintains a bigger stake in more stable areas. For instance, Vanguard Emerging Markets Stock Index VANGUARD EMERGING MARKETS STOCK IDX INV VEIEX 1.62% , recommended on our MONEY 50 list, has 23% of its assets in China, 15% in Taiwan, and 5.2% in Russia. T. Rowe Price Emerging Markets , also on the MONEY 50, holds similar country stakes.

Then add a second fund, tilting toward added safety or a riskier bet, as you prefer. Cautious investors might gravitate to Matthews Asian Growth & Income MATTHEWS ASIAN GROWTH & INCOME FD MACSX 0.49% , which holds dividend-paying stocks from developed and emerging Asian countries.

Looking for more pop? Add a frontier-market fund, such as Guggenheim Frontier ETF . Just be sure to fasten your seat belt for the inevitably bumpy ride.

TIME Emerging Markets

New Leaders Aren’t Going to Solve India’s and Indonesia’s Problems

General Election Campaign Begins In Indonesia
The Asahi Shimbun Indonesian presidential candidate and Jakarta Governor Joko Widodo, center, shakes hands with his supporters after making a speech in Jakarta as the election campaign kicks off on March 16, 2014

Hope that economic reform in the two sprawling democracies will be jump-started when new administrations are in power might be misplaced

Rarely has the mere announcement of a candidacy been met by such investor relief. On the day, earlier this month, when Joko Widodo was nominated for President of Indonesia by a major political party, the stock market surged and the currency strengthened. The country had been battered in recent months by nervous investors, but the mere hope that Jokowi, as he is commonly called in Indonesia, will triumph in July’s presidential election gave hope to the business community that much needed reform would progress in the world’s fourth most populous nation.

The situation is similar in India. After years of lackluster reform, the business community is abuzz that the opposition Bharatiya Janata Party (BJP) will likely win general elections starting in April and install the controversial Narendra Modi as Prime Minister. The hope in the world’s second most populous nation is that Modi, a proven economic reformer, will tackle the problems that have caused the economy to stumble.

But is the hope justified? Both Asian giants are badly in need of a jolt of new reforms, and perhaps fresh leadership will spur the effort forward. Yet even if Jokowi and Modi manage to win their elections, there is no guarantee of progress. Both could get entangled in political conflicts that could thwart any attempts at rapid change.

That could be a problem. India and Indonesia are two of the “fragile five” — the emerging economies deemed most vulnerable to the U.S. Federal Reserve’s tapering of its unorthodox stimulus program — and beginning in the summer of 2013, both countries’ currencies have experienced periods of dramatic decline as investors fled.

India is probably in worse shape than before. A do-nothing, Congress-led administration allowed political disagreements to stymie the promarket reform that sparked India’s rapid growth. As a result, the GDP growth rate has shrunk to half what it was just a few years ago. Most desperately, the country needs to cut red tape to prevent the overbearing bureaucracy from smothering investment projects.

The story is similar in Indonesia. After a burst of reform early in his presidency, Susilo Bambang Yudhoyono’s effort got strangled in politics within his coalition. Much like India, Indonesia needs to clear up confusing regulation and improve infrastructure to boost investment and growth.

Can Modi and Jokowi deliver? Jokowi, as the governor of the capital, Jakarta, is known as a man of the people, taking regular jaunts onto the streets to talk with voters and instituting improvements to welfare programs. But running a city — even one as large and unwieldy as Jakarta — and governing the nation are two very different things. As President, Jokowi would have to push reforms through parliament, the members of which will be elected in April. Whatever happens, Indonesia’s parliament will likely be a messy place filled with contending political movements. Also, on national policies, Jokowi has said little, so we just don’t know much about what his policy platform will be.

“We believe that his overall policy bias is likely to be market-friendly, supporting investor confidence,” was the best economists at Barclays could say about him in a recent report.

Modi has a more developed track record. As chief minister of the state of Gujarat, he is credited with engineering an economic “miracle” there with probusiness reforms like streamlining bureaucracy and improving infrastructure. (For more, see my colleague Krista Mahr’s analysis of Modi’s record.) Yet achieving similar results at a national level will be much harder. It is likely that even if the BJP garners the most parliamentary seats in the election, the party may still have to govern in a coalition, raising the possibility that squabbles between its members will block reform as they have done in the current Congress-led government. Nor is it clear that the BJP is any more proreform than Congress, especially when it comes to politically sensitive issues. According to a recent report by Capital Economics, no BJP-governed state — including Modi’s — approved a controversial Congress reform opening up the retail market to multibrand stores. “The BJP’s recent record suggests that it is less committed to progrowth reform than many assume,” the research firm noted.

So in the end, whatever the intentions of Jokowi and Modi, they could get trapped in the same political problems that consumed their predecessors. What it will take to press reform in these two big democracies is some serious political will. We’ll have to wait and see if these two men have it.

Your browser is out of date. Please update your browser at http://update.microsoft.com