Hundreds of millions of Chinese citizens are on a collision course with the middle class - but this doesn't mean it's the first market you should consider.
A study from The McKinsey Quarterly supports this well-documented phenomenon, and estimates that it will take two decades before the Chinese nouveau riche reaches its full spending potential.
I'm not about to refute that claim here. But instead, I want to caution you: Don't be blinded by the euphoria over Chinese consumers and overlook an equally compelling opportunity in another emerging market.
Let's head down to Brazil and I'll explain why - along with the best way to profit, of course.
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Okay, I get that the scale of the Chinese opportunity - a population of 1.31 billion people, compared to Brazil's 192 million citizens - dwarfs Brazil's. But that doesn't mean the profit potential is any less.
On the contrary, in fact. I'd actually say Brazil's profit potential is greater when it comes to tapping into a blossoming middle class. In this regard, Brazil boasts several notable advantages over its China counterpart. After all, Brazil:
But most important of all is the cultural difference. The Chinese are notorious savers, yet Brazilians love to spend, spend, spend. And don't just take my word for it. As Illan Goldfajn, chief economist at Brazilian bank Itau Unibanco Holding SA (NYSE ADR: ITUB) recently stated, "if the world is looking for savers, Brazil is not much good ... But if it's looking for consumers, then we might be able to help."
As is the case in China, Brazil has a rapidly expanding economy. In fact, GDP growth this quarter is expected to check in at a tidy annualized rate of 9%. As a result, unemployment is falling and incomes are rising. And that's leading to an explosion in the middle-class.
Over the last four years alone, Brazil's middle class has swelled by 24%, lifting roughly 20 million people out of poverty, according to Brazil's Census Bureau. Furthermore, the consultancy PriceWaterhouseCoopers LLP expects this rapid increase to continue. So much so, in fact, that it will propel Brazil's largest city, Sao Paulo, from the 46th spot on the world's wealthiest city list to fifth place in a little over a decade.
And I have no doubt all that newfound wealth will quickly be spent. Because it already is being spent! Consider this:
And despite all this, Brazil's consumer-spending boom is still in its infancy. Thanks to a surging economy and stable inflation, we can expect more and more Brazilians to be able to afford their first mobile phones, cars, even homes in the years to come.
And if you want to know the hands-down, best way to profit from this trend, just read on.
Go with small-cap stocks.
I say that because the majority of the companies in Brazil's small-cap sector cater to domestic consumers (either directly or indirectly).
We're talking about such businesses:
These industries are destined to profit the most - and in turn, witness the most appreciation in stock prices, as conspicuous consumption takes root south of the equator.
And for you naysayers and China lovers out there, the stats back up my claim that Brazil is a better place to profit right now. Brazilian stocks are up 128% this year, compared to a 62% rise for Chinese stocks, based on the MSCI/Barra indexes.
Momentum is squarely on our side. So don't fight it - embrace it.
[Editor's Note: Louis Basenese, Small Cap and Special Situations Expert for Investment U, is one of the investing sector's leading experts on the dealmaking market, including such transactions as mergers & acquisitions (M&A), initial public stock offerings (IPOs) and private equity. For more information on Investment U, please click here.]
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