As wealth grows in emerging markets, as does opportunity.
One of the big investment themes over the next couple of decades is going to be the rapid increase in the number of middle-class consumers in the developing world. We've seen what happens when countries like Japan, Singapore, South Korea and Taiwan transform their economies; they end up with a large middle class with Western levels of income and a strong desire for consumer goods, and many other countries now look set to emulate their growth.
So it's likely that countries such as Brazil, China, India, Indonesia and even some African nations will be in a similar position in a generation or two. Since consumers in these countries already like to buy Western-branded goods this trend looks set to continue. So why not get a piece of the action?
Quality products and strong brand names
One of the most important things when selling to aspirational consumers in the developing world is to have a good product. Western companies have a big advantage here because of the generally lower quality of most domestic brands in the developing world.
A good example of the importance of branding can be seen in how China's consumers responded to the baby milk scandal of 2008, where several products were deliberately contaminated with melamine, resulting in six deaths and hundreds of thousands of sick babies. Many were put off Chinese brands as a result and turned to foreign brands.
Think global, stay local
An easy way to invest in companies that sell to consumers in the developing world is to look at British companies that already have a strong presence there. My personal favourites are the FTSE 100 giants Diageo (LSE: DGE) and Unilever (LSE: ULVR), both of which have a long history in these markets.
Unilever already makes over half its sales in the emerging markets and it expects this to rise to three-quarters by 2020. It has been a major player in India for over 80 years through its majority-owned subsidiary Hindustan Unilever, so it already has a big slice of the Indian market.
Diageo's fastest growing markets are in South America and Africa, as you can see from its most recent quarterly management statement where sales rose by 18% and 12% respectively, which more than makes up for a 1% fall in sales within the sclerotic eurozone.
Another increasingly popular product in the emerging market nations is tobacco, in contrast to the developed world, and if I was happy about investing in tobacco -- I'm not, on moral grounds -- then my portfolio would be heavily weighted towards tobacco via the likes of British American Tobacco (LSE: BATS) and Imperial Tobacco (LSE: IMT).
A few more companies
It's not too hard to find some other British companies, both large and small, with emerging market interests. I tend to be biased in favour of consumer goods companies with strong brands, such as PZ Cussons (LSE: PZC), which is best known for its Imperial Leather range of soaps and for whom Africa is a much bigger market than Europe.
But there are also many non-consumer goods companies with a decent long-term track record in these markets. One of these is the insurance giant Prudential (LSE: PRU), which generated 44% of its profits last year in Asia, more than any of its other divisions.
A very fast-growing sector in the emerging markets is mobile telephony. But rather than getting involved in the handset market, where competition is cut-throat, why not instead buy shares in the network providers? One such is Vodafone (LSE: VOD), which has a piece of the mobile phone network market in most countries and whose shares currently sit on a prospective price-to-earnings (P/E) ratio of 10.9 where their forecast yield is 7.4%.
Don't limit yourself to Britain
As it is quite easy to buy shares on the major foreign stock exchanges, why limit yourself to British companies? After all, some of the biggest players on the emerging markets stage are American companies such as Coca-Cola (NYSE: KO.US) and McDonald's (NYSE: MCD.US).
My number one non-British emerging markets pick is McDonald's biggest competitor Yum! Brands (NYSE: YUM.US). You may not know the name, but you've almost certainly heard of its KFC fast food restaurants -- which have been in China for almost 25 years -- and it looks as if India also has the potential to become yet another big market for Yum!
The downside is that Yum!'s shares are on a very high historic P/E ratio of 26, though forecasts for the current year cut this to 21, which means that a lot of future growth is already in Yum!'s share price. In contrast, Diageo -- which many investors consider to be expensive -- trades at a P/E of around 18. This comes with the territory; many emerging markets plays are on high P/E ratios precisely because of their growth prospects.
When it comes to supplying tobacco consumers in the emerging markets, the name which stands out is Philip Morris International (NYSE: PM.US), which was the non-American arm of Altria (NYSE: MO.US) until it was spun off in 2008. If, like me, you question the morality of supplying an addictive and highly damaging product to consumers in the developing world, then you won't want to touch these with a barge pole. If not, then I recommend a closer look.
If you're not happy about investing in individual companies, another way to invest in the emerging markets is via funds such as JPMorgan Emerging Markets (LSE: JMG) or Templeton Emerging Markets Investment Trust (LSE: TEM).
Many funds like these specialise in domestic companies within the emerging market nations, rather than Western companies such as those mentioned above, which makes them a nice addition to a diversified portfolio. After all, it's quite possible that consumers will end up preferring domestic brands; though many of these will be bought by the multinationals, just as many "British" brands are now owned by non-British companies.
Either way, consumers in the emerging markets offer investors yet another way in which to profit over the longer term, as well as to diversify their portfolios.
David Kuo challenged his Motley Fool analysts to pinpoint the attractive sectors of 2012 -- and they delivered! Discover the industries they selected in this new Motley Fool guide -- "Top Sectors Of 2012" -- while it's still free!
Further investment opportunities:
> Tony owns shares in Diageo, Templeton Emerging Markets Investment Trust, Unilever and Yum! Brands. The Motley Fool owns shares in PZ Cussons.