by Tassos Stassopoulos, AllianceBernstein

Big is not necessarily beautiful when it comes to forecasting emerging markets. In fact, the kind of big numbers that are often bandied around can actually make it harder for investors to understand what’s really going on. We think there is a better way.

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Forecasts for consumer spending illustrate the problem. Everyone is in accord that the consumer is going to be a big growth driver in emerging markets. But nobody seems to be able to agree about the figures. According to BCG, the consultants, China and India will consume US$10 trillion of goods and services by 2020, whereas UBS puts the same value on China alone. These disparate forecasts don’t do much to help the investor identify the winners and losers.

Big Numbers Miss Key Trends

Part of the problem is the way that forecasters get to such big numbers. Often, they will take current gross domestic product, apply a notional growth rate and assume that personal consumption rises in line. Reality is, of course, never quite that neat and tidy.

In fact, the early stages of successful developing economies are typically dominated by exports. In this phase, the domestic consumer is relatively unimportant. But as the economy starts to become more sophisticated and wealth trickles down, the domestic market takes on increasing significance. Indeed, the consumers’ share typically grows faster than the economy as a whole, which is why most estimates substantially underrate the value of the consumer.

BRICs Consumer Markets Vary Wildly

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