Imagine your daily consumption costing you less than a cup of Starbucks. About 1.3 billion people around the world live this reality. The good news is that it’s the lowest number of people ever.

The World Bank released an update to its consumption poverty estimates in developing countries, and for the first time ever, the organization found progress in all the regions they track. In terms of the number and percentage of people living on $1.25 a day (on a purchasing power parity) at 2005 prices in 130 developing countries, the world is a little richer.

The area seeing “dramatic progress” was East Asia, reports the World Bank. Back in the 1980s, this region had the world’s highest incidence of poverty. Nearly 80 percent of people lived on less than $1.25 each day; In 2008, the number dropped to 14 percent.

Across these poorest countries, in 1981, 70 percent of people were living on less than $2 a day; 2008 data shows that the figure has fallen to just above 40 percent. Whereas just over 50 percent of people in the poorest countries were living on less than $1.25 a day in 1981, only about 25 percent are today.

I discussed the importance of this rising consumer with CNBC’s Squawk Box Asia’s Martin Soong and Lisa Oake this week. I stopped by their studios while I was in Singapore to discuss my thoughts on the continuing build-out of emerging markets.

Watch it now.

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The S&P/ASX 200 Index is a market-capitalization weighted and float-adjusted stock market index of Australian stocks listed on the Australian Securities Exchange. E-7 are the seven most populous emerging market countries—China, India, Indonesia, Brazil, Pakistan, Russia and Mexico.

Bloomberg announced over the weekend that China’s manufacturing grew at the fastest pace in a year. We follow the government’s Purchasing Managers’ Index (PMI) closely, as we believe it is a better indicator of China’s domestic demand than the HSBC PMI. Whereas HSBC PMI surveys 400 small and mid-sized companies, which are typically export-oriented, the government’s PMI surveys 820 mostly large, state-owned enterprises across 20 industries.
Though manufacturing activity exceeded analysts’ estimates, some China bears focused on the fact that the March 2012 number is lower than the average during the third month from 2005 through 2011. What’s important for investors to consider is that the trend is your friend: It is the fourth month in a row where the PMI landed above the three-month PMI, and shows the economy is on the right path.

Below are three additional constructive trends we see in China.

1. China Returns Poised to Revert to the Mean

Over the past few years, Chinese stocks have lagged compared to their emerging market peers. However, the Periodic Table of Emerging Markets perfectly illustrates how last year’s loser can be this year’s winner. Historically, every emerging country has experienced wide price fluctuations from year to year. Over time, though, each country tends to revert to the mean.

In the visual below, we highlighted China’s performance pattern over the past 10 years. Chinese stocks landed in the top half four out of 10 years—2002, 2003, 2006 and 2007. In 2003, China climbed an astounding 163 percent; in 2007, it was the top emerging market again, returning nearly 60 percent.
Since then, the country has fallen to the bottom half of the chart. If you apply the principle of mean reversion, history appears to favor China landing in the top half during this Year of the Dragon.

See the original Periodic Table of Emerging Markets here.

2. Liquidity Cycle Could Benefit Stocks

Yet China leaders won’t leave its success to pure luck. If the Dragon doesn’t breathe fire into markets, it may be a shot of liquidity injected by policy easing that could drive stock prices higher. Macroeconomic theory states that when a country’s money supply exceeds economic growth, the excess liquidity tends to drive up asset prices, including stocks.

BCA Research documented this trend in China over the past eight years. The research firm compared the difference between the change in money supply growth and nominal GDP growth and Chinese stock prices. In both instances when the change in excess liquidity fell to a low, so did stocks. Conversely, the rise of money supply growth compared to GDP growth “coincided with major rallies” for China’s stock market, according to BCA.

Today, it appears that the change in excess liquidity is just beginning to bounce off another low, as are stocks, indicating another potential inflection point.

3. Incentive to Maintain Growth

BCA hedges China’s possible stock advancement in the short-term if signs of economic improvement continue because they “reduce the odds of aggressive policy easing.” A few weeks ago, I discussed how investors seemed to overlook China’s focused macro policy strategy, with its actions deliberate and purposeful. This year, the government has extra incentive to sustain meaningful growth as it transitions to a new leadership by the end of the year. As President Hu Jintao and Premier Wen Jiabao depart, Xi Jinping and Li Keqiang are expected to take over.

Looking at historical GDP growth per year since 1978, Deutsche Bank finds there’s precedence for this idea. During the fifth year of the leadership transition cycle, “high or stable” GDP growth was maintained, with the exception being the Asian Financial Crisis in 1997.

These trends will be covered in my upcoming webcast on China with CLSA’s Andy Rothman. Join us as we discuss what investors should expect from China in terms of long-term GDP growth, fixed asset investment, exports and the housing market.

When I was in Singapore at the Asia Mining Congress last week, I was fortunate to be among a group of sharp and intelligent experts across the financial and mining industries. A China bull presenting an excellent case for the country was Jing Ulrich, JP Morgan’s managing director and chairman of China equities and commodities group. She’s the Oprah Winfrey of the investment world, as for the past three years, Forbes Magazine has ranked her among the 50 Most Powerful Women in Business.

Ulrich expressed similar views toward China and its political will in a recent “Hands-On China Report” following her attendance at the China Development Forum in Beijing. She said that the government ministers emphasized their commitment to rebalancing the economy toward consumption. While “fundamentals are currently sound, the nation must modify its ‘imbalanced, uncoordinated and unsustainable’ course of development,” says Ulrich. What investors should remember is that the government had the financial resources to effect this change and considered it important to maintain sustainable growth.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The Hang Seng China Enterprises Index is a capitalization-weighted index comprised of state-owned Chinese companies (H-Shares) listed on the Hong Kong Stock Exchange and included in HSMLCI index (Hang Seng Mainland Composite Index).

Turkey has been a bright spot for emerging markets this year, nearly tripling the performance of other Emerging European countries. Tim Steinle, co-manager of the Eastern European Fund (EUROX), has just returned from a research trip to Turkey and reports the Turkish story is gaining momentum.

Industrial Production (IP) grew 11 percent during September compared with the same time period a year ago, reflecting the economy is getting stronger. Global investors are starting to take notice. Roughly $40 billion has flowed into emerging markets so far this year and just over 5 percent of those inflows ($2.3 billion) have landed in Turkey.

Some Central Emerging Europe-Middle East-Africa funds already allocate half of their assets in Turkey and recently some “go-anywhere” global funds have upped their allocations.

Some fear the strong recovery could trigger whiplash inflation but the Turkish central bank prefers to sterilize liquidity instead of raising interest rates in order to keep Turkey’s currency, the lira, from appreciating against its peers. One former central bank governor says that he hopes Turkey can follow in the fiscal footsteps of Brazil, which has been able to keep its own currency valuation under control despite rapid growth in the country’s economy.

The future looks bright for Turkey but there are some potential hurdles the country must overcome. Rising consumption, especially for energy, puts a strain on Turkey’s current account (i.e., the country’s balance sheet) and tilts the country’s trade balance toward imports.

However, Turkey envisions itself as the region’s energy transportation hub. Roughly 1.5 percent of the world’s oil goes through Turkish pipelines and several projects already under construction should ease the country’s energy dependence on foreign sources. In addition, tariffs on the oil and natural gas passing through the pipeline should offset some of the import costs.

Another hurdle is that Turkish Islamists and secularists hold extreme and opposing views, and the rift is deepened by the class divide of poor versus the elite. Will the wider masses take advantage of the new opportunities to better their lives or will the country swing toward theocracy like Saudi Arabia or Iran?

The entrepreneurial predisposition and the failed social experiment of the latter ought to keep that from happening.

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Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk.  By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.  The Eastern European Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries.  The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.