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Thursday, July 18, 2013 - 10:00am

China's economy is slowing, Brazilian and Turkish citizens are in revolt, and commodity prices have fallen sharply. It's no wonder that investors have pulled millions out of emerging market funds in the past few months.

Yet it's unwise to paint these markets with a broad brush. They may be experiencing sporadic hiccups, but they still possess one of the most dynamic investment themes of the early 21st century: rising middle classes that are fueling steady gains in consumer spending.

Let's look at China as an example. The world's second-largest economy had been witnessing double-digit gains in consumer spending, though the Chinese government just announced that the growth rate slowed to 6.5% in the second quarter of 2013. Developed economies in North America would love to generate that level of growth.

Take Indonesia as another example. As I noted earlier this month, auto sales rose 17.8% in the first quarter of this year from the same period last year. Around the globe, you'll notice a clear trend: Exports from emerging markets to China and elsewhere are slumping, but domestic consumption figures are relatively stronger.

Equally important, population figures suggest it's crucial to stay focused on emerging markets. They account for 3.39 billion citizens, compared to 786 million citizens in the developed world, according to the World Bank. And even with all of the current headwinds in place, emerging market economies are expected to grow 5% to 6% in 2014, according to the IMF, which is three times the projected growth rate of developed economies. Looking further out, strategists at McKinsey & Co. estimate that by 2027, 55% of the world's GDP growth and 95% of population growth globally will come from emerging markets in Asia, Africa, Latin America, and Eastern Europe.

U.S. Vs. China
Although China's population is more than four times larger than the U.S. population, we still spend more on certain items (and much more in per capita terms). Yet in areas like alcoholic beverages and tobacco, you are missing the boat if you invest only in U.S.-focused companies.

Consumption patterns in other emerging markets vary:

  • In Turkey, for example, spending on home and personal care products is growing 15% annually, according to Euromonitor.
  • Analysts at Citigroup note that Brazilians spent $4.3 billion on deodorant last year, which is as large as the next two markets (the U.S. and the U.K.) combined.
  • People in India use twice as much bar soap as toothpaste (whereas most countries spend more on bar soap than toothpaste).

The key takeaway is that the biggest growth in consumer spending is taking place far from our shores. So at a time when many other investors are abandoning these emerging markets, you need to stay focused on the global companies that serve emerging market consumers. Here are my current favorites:

1. Coca Cola (NYSE: KO)
Did you know that Coke derives 75% of its profits outside the U.S.? That's likely due to the fact that the company's profit margins in emerging markets are two to three times higher than they are in the U.S. Coke's products are slightly cheaper in those markets, but its costs are far lower. Emerging markets are moving beyond just soda, consuming more ready-to-drink coffee, bottled tea and juice drinks. Coke's global expansion into these niches over the past half-decade is now paying off handsomely.

2. Brown-Forman (NYSE: BF)
You'd think that this purveyor of Jack Daniel's whiskey, Southern Comfort and more than a dozen other spirits would be a purely American phenomenon. Two decades ago, 85% of sales were derived in the U.S. -- but these days, global growth predominates, with roughly 60% of sales coming from abroad in 2012. The changing geographic sales mix can be explained by a rising global taste for brown liquors, especially in Asia.

3. Mondelez International (Nasdaq: MDLZ)
This Kraft spin-off is the leading seller of biscuits and other snacks in the BRIC countries (Brazil, Russia, India and China). One of the hallmarks of consumers that have only recently entered the middle class is a desire to spend more on luxuries, and not just on necessities. That explains why Mondelez's sales are growing at a double-digit pace in those BRIC economies.

4. Colgate-Palmolive (NYSE: CL)
Thanks to several decades of heavy investments in the leading emerging markets, this firm has the dominant market share in range of hygiene products. And strong market share has led to profit margins in most emerging markets that are 30% to 40% higher than in Europe or North America.

5. BRF (Nasdaq: BRFS)
This is one of Latin America's largest protein providers. Rising beef, pork and poultry consumption is another hallmark of the upwardly mobile middle class consumers in these markets. Capitalizing on that trend, NRF, also known as Brasil Foods, has seen revenues grow from $3 billion in 2007 to around $13 billion today. Analysts predict double-digit sales growth in 2013 and 2014 as well.

Risks to Consider: This could prove to be an off year for emerging markets if the China slowdown accelerates, so these should be viewed as long-term themes, not short-term trading opportunities.

Action to Take --> If you take the long view, the ongoing expansion in emerging market consumer spending is far from over. It may wobble a bit in the near term, but demographic trends point to growth rates over the next decade that should far exceed our market.

P.S. -- Coke has established itself as a force overseas, but did you know there's another soda company that's growing profits 12 times faster than Coke and 60 times faster than Pepsi? Get the name of this stock now while it's still largely unknown by clicking here.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.