Are the best days of growth for emerging markets behind us? Not according to U.S. CEOs. Listen to the corporate earnings call of any large U.S. multinational company and you will hear the majority of CEOs repeating the same mantra: Our future growth is in emerging markets.

From General Motors, Pfizer and Wal-Mart to Coca-Cola, multinationals are putting dollars to work in these countries, which they have been depending upon for their top-line revenue growth. This is not surprising: The global GDP growth of emerging markets has been double that of developed countries over about the past decade. That trend is expected to continue.

This year, for example, global GDP is expected to grow 4.4%, with roughly two-thirds contributed by emerging markets. If you keep the growth in current prices constant using International Monetary Fund outlook assumptions for 2011-2015, for the U.S. and China at 4.4% and 11.7% per year, respectively, simple math tells us that China's contribution to global GDP will be larger than the U.S.'s in 13 years. At that point it will also produce 19% of global GDP, up from its current 9%.

Emerging and developing economies already produce 36.5% of global GDP. That could be 50% in a mere ten years and as much as 60% by 2030.

Obviously, this view doesn't take into account unpredictable variables such as foreign exchange rates or inflation, but the trend is clear. With strong domestic fixed-asset investment growth, high infrastructure spending, growing private consumption (fueled by a growing middle class), growing population, and increasing trade, emerging markets are rapidly becoming a major force and driver of growth in the global economy. Population growth will likely be a consistent driver, as will the rapid urbanization of these regions. The United Nations estimates that by 2025, the world's population will have grown from seven billion to eight billion, with the majority of growth coming from emerging markets. China and India have populations of 1.3 billion and 1.2 billion, respectively, comprising 37% of the world's population. This is followed by Africa with 1 billion, representing 15%.

Corporate America Responds
According to the United Nations Conference on Trade and Development (UNCTAD), foreign direct investment (FDI) into developing economies was $256 billion in 2000, $330 billion in 2005 and then almost doubled over the next three years to $630 billion in 2008. The U.S. financial crisis at the end of 2008 caused FDI to drop to $487 billion in 2009, but investments rebounded 9.2% to $524 billion in 2010. This is especially remarkable when compared to the FDI in the developed world, which declined 6.9% annually over the same period, to $526 billion in 2010.

The vast majority of the top 25 S&P 500 Index companies are touting strong emerging market growth. Mark Loughridge, the CFO of IBM, had this to say during the company's fourth-quarter 2010 earnings call: "To capture the opportunity in emerging markets, we created a dedicated management system and have been investing to drive market expansion and infrastructure development. ... We had really strong performance against expanding opportunities in the growth markets. I mean our signings in growth markets were up more than 250%. I mean, imagine that."

Coca-Cola has been investing in emerging markets for years and is now reaping the benefits. The company noted that the "BRIC" countries-Brazil, Russia, India and China-represented almost 40% of its total incremental volume growth in 2010.

Apple reported that its revenue from greater China last quarter was $2.6 billion-a fourfold increase from a year ealier. "To put an exclamation point by that, we did a little over $3 billion for the entire fiscal year 2010," Apple COO Tim Cook remarked.

Investing in emerging markets isn't just a way for U.S. corporations to continue generating positive revenue and earnings, especially given the low growth rate in the U.S. It is also a way to remain in the global game.


Emerging Market Corporate Growth
The impact of the 2008 U.S. financial crisis proved to be extremely short lived for emerging market corporations. They are back on track, continuing a growth trajectory that began in 2000.

In a mere five years, the market capitalization of the Hang Seng Index grew 44%, the Bombay 200 Index, 55%, the Shanghai Composite Index, 63%, the Brazil Bovespa Index, 68%, and Russia's RTS Index, 17%. During this time, the market capitalization of the S&P 500 Index went up only 1%. These emerging markets showed an annual appreciation ranging from 6% to 11% versus 0.2% for the S&P 500 Index. There are now 50 listed companies in Brazil with a market capitalization greater than $5 billion, 62 in the Bombay Index, and 87 in the Shanghai Index. The U.S., at 425, dwarfs these numbers, but the U.S. number is mostly stagnant, while in emerging markets it is still growing. These emerging market companies are quickly becoming juggernauts in their own right. The largest company we follow is Exxon Mobil, with a market cap of $397 billion. Some notable others include Brazil's Petrobras, at $211 billion, and Vale, at $157 billion. China's PetroChina is at $297 billion and Industrial & Commercial Bank of China is valued at $248 billion.

The strength of emerging market corporations is not only reflected in the rapid recovery of emerging market equities, but also by the speed in which international capital markets reopened.

In 2007, emerging market corporates issued over $155 billion in new debt. Issuance dropped to $57 billion in 2008, but then came roaring back with $136 million in 2009 and finished 2010 at $198 billion. This year, the street expects emerging market corporate new issuance to reach $225 billion, for a net supply of $163 billion.

Why did the market return so quickly? We believe it is similar to what is happening with corporate America. International investors are likely responding to the long-term prospects of emerging markets as well as their attractive return potential. Emerging market corporate debt spreads have tightened significantly-1,282 basis points in November 2008 to 311 basis points as of March 2011. This tightening was generally in line with other U.S. asset classes (Figure 1). However, similar to U.S. high yield, emerging market corporate debt spreads have not yet returned to their pre-crisis spreads of around 151 basis points (February 2006). For this year, we believe that emerging market spreads have the ability to test levels in the range of 250 to 275 basis points. This would make emerging markets particularly attractive, especially when measured by credit rating. Large emerging market corporates typically have stronger credit ratings than their U.S. counterparts.

According to Bank of America, a representative sample of 200 corporations in their BofA Merrill Lynch U.S. Emerging Markets Liquid Corporate Plus Index had an average gross leverage ratio around 1.2x during 2006-2008. This increased only to 1.9x by year-end 2009, and is back to 1.5x as of mid-2010 (Figure 2). Leverage ratios are declining, and so are default rates. The default rate for emerging markets is currently 1.3% and estimates indicate it will drop below 1% in 2011. To put this in context, U.S. high yield has an estimated default rate of 2% for 2011.

Revenue for emerging market corporates increased by 6%, year-over-year as of the first half 2010, with average EBITDA margins returning to the 27% to 28% range from a low of 24%. Improved financial transparency is also helping to increase investor confidence as the majority of emerging markets have adopted International Financial Reporting Standards (IFRS).

Finally, we believe, emerging market corporates typically operate in countries where their governments have been implementing far more prudent fiscal and monetary policies than the U.S. or Europe. This prudence enabled most governments to support their domestic industries during the financial crisis of 2008 and 2009, which proved to be a major driver of strength during the resurgence of emerging markets in 2010.

Summary
U.S. multinationals are increasingly aware that they need to invest in emerging markets or risk being outrun and outpaced by emerging market corporations over the next two decades. Therefore, investing in emerging markets is no longer a choice; it is a must for corporate America. Investors can embrace this theme on multiple levels. We invest in large U.S. multinationals that are directing their investment dollars towards emerging markets, and we invest directly in what we view to be the most attractive emerging market corporate securities.

Josephine Shea is vice president and senior credit research analyst covering emerging market credit for Hartford Investment Management.