By The Editors of Wealth Management Exchange

With the subprime mess and the slowdown of the U.S. economy, investors turned their attention to emerging markets and the highly touted BRICs, Brazil, Russia, India and China. Still emerging markets have not done so well in 2008.

Investors looking to add balance and profitability to their portfolios might take a look at some "emerging domestic markets."

"For domestically-focused investors and companies, gaining exposure to the rapidly growing US Hispanic population offers the best prospect for sales and earnings growth over the next three years," concludes a report from Goldman Sachs, "US Hispanization: Long/Short Strategies."

The US population will hit 309 million by 2010, according the US Census Bureau, and that number will include 48 million Hispanics. But the interesting number is that almost half the growth over the next three years will come from the Hispanic community.

Researchers at Goldman Sachs believe many investors are not aware of this strong growth number nor of its investment implications. "Although in macro trends it is often difficult to implement and track given the lack of easily-identifiable catalysts, we believe the investment community will pay closer attention to Hispanization as companies allocate more resources in related efforts," note Goldman researchers.

Hispanics control more disposable income than any other minority group. That number is now $860 billion per year and should hit $1.3 trillion by 2012, says Jeffrey Humphreys, an Hispanic demographic expert at the University of Georgia.

The Geography of Hispanization

The largest Hispanic populations are concentrated in California, Texas, Florida, New York and Illinois. These five states represent two-thirds of the Hispanic populations. Thus these are the best markets to target for companies exposed to Hispanic spending.

"We would focus on large-cap companies in these states where established Hispanic communities exist and where the largest amount of Hispanic expenditures may be found," comments the Goldman report.

But there are other areas where companies, and investors can seek opportunities from this growing trend. For one, take a look at those states with the largest concentration of Hispanics relative to total residents. These states include New Mexico, Arizona, Nevada, Colorado and New Jersey. Goldman expects to see companies boost their advertising, marketing and product placements budgets in these markets.

But another interesting trend to note is that Hispanics are now migrating into the Midwest and the South as the Western states impose tougher immigration crossing restrictions, specifically in Texas and California. More illegals are crossing in Arizona and then migrating to other parts of the U.S.

The Goldman report estimates that Hispanic populations grew the fastest recently in states such as South Carolina, Georgia, Tennessee, North Carolina and Maryland.

A report in The Economist points out that the Latinization of the meat packing and food processing industries has led to the Latinization of "heartland' communities in the Midwest. Milwaukee, the city known for beer and sausage, today has 80,000 Hispanics, about 15% of its total population. Many Latinos now believe they can boost their standard of living by migrating to the South and flourishing parts of the Midwest.

Products for the Latino Market

The Goldman report notes that Hispanics are spending more on housing and contributions to insurance and pensions. "Insurance companies and retail banks stand to benefit, spanning from more openings of bank, pension and insurance accounts to increased use of other financial services such as international money transfer."

As Hispanics expand their standard of living, they are likely to spend more on entertainment. The Goldman report also expects Hispanics to spend more on health care, particularly health care insurance and decrease their allocation to food and apparel.

So where do the investment opportunities lay hidden? First, take a look at housing. The Consumer Expenditure Survey points out that Hispanics earmark more than twice the allotment of non-Hispanics to "Rented Dwellings." That is partly because Hispanics have much lower home ownership rates. Goldman research screened Apartment REITs that own and operate a higher percentage of units in Hispanic areas.

REITs do not report tenancy by ethnic categories so Goldman could not determine specifically which companies tailor their offering to Hispanics. "However, we believe that real estate companies concentrated in the relevant states will benefit regardless of their specific tenant composition compared with companies that have no presence at all."

Still Goldman warns investors that the current housing downturn "represents a serious risk to our thesis" in the short-term.

Although Hispanics have decreased their allocation to retail expenditures (food, apparel and personal care) this category still represents about 20% of Hispanic household budgets. Goldman researchers believe investors should focus on mid-cap companies with exposure in California, Texas, Florida, New York, Illinois (Chicago).

Among those companies that Goldman categorizes as "buy" recommendations: Winn-Dixie Stories (with 69% share of stores in Hispanic target states): Ross Stores, Inc. (55%) Costco Wholesale Corp. (54%) and Whole Foods Market (51%).

Finally, there is health care. While Hispanics have traditionally allocated smaller expenditures to health care spending than non-Hispanics, Goldman believes this category represents a nice growth investment opportunity. About 33% of Hispanics do not have health insurance compared to just 11% for non-Hispanics. "We expect the rate of uninsured Hispanics to converge with the national average. We believe that insurance companies that market to Hispanics and retain agents in the "Right" states, are best poised to benefit from this demographic shift."