Specialist Outlook

Emerging opportunities

28 March 2013

Burgeoning emerging markets (EM) are an increasingly potent driver of the global economy. 

Over the next 12 years, it is estimated that the EM will see the greatest increase in consumer demand in history, a rise in consumption of $18 trillion p.a., to $30 trillion p.a. No wonder investors and Western companies are so focused on growth in the emerging world.

This remarkable data is driven by the ‘great convergence’ of living standards as billions of people enjoy, in one generation, a change in their lifestyles comparable to that experienced by Europeans and Americans during the industrial revolutions of the 19th and 20th centuries. The global ‘middle class’ is set to expand from 1.8 billion people in 2009, to 3.2 billion in 2020 and 4.9 billion by 2030 (the ‘middle class’, in this context, is defined as having roughly a third of their income left for discretionary spending after expenditures on food and shelter). This expansion is helped by positive demographic trends, with the number of active workers and households increasing. By 2050, India will be the most populous country on the planet, with a stable population of 1.6 billion people. But the average incomes of those 1.6 billion people will be six times larger than they are today. Income growth and development happen at different rates in each society. For example, it is estimated that China has created 3 million US dollar millionaires in the last 10 years (and, according to one survey, on average each owns 4.2 luxury watches!). Yet 528 million Chinese still live on less than $1,000 per year.

The rate of income growth depends on a wide range of factors, but demographics, urbanisation, technology, education, global trade, credit multiplication, governance and government all play a crucial part. The Chinese government’s policies have resulted in extra-ordinary improvements in incomes through market liberalisation and bold central planning. 2013 will see a new range of large state projects in China: the launch of a lunar probe - Chang’e 3 - which will position the first permanent telescope on the Moon; completion of the world’s tallest building in the central province of Hunan, and the opening of the first phase of the world’s largest water management project, diverting billions of litres 700 miles to the arid North from the Yangtze river in the South.

But while large infrastructure projects provide jobs and the structures and urban environment of a developed society, it is the increase in household incomes and the resulting consumption that have the greatest long-term impact and provide the foundations for a sustainable, healthy economy.

Spending patterns change dramatically as income levels rise from below $1,000 p.a. to between $3,000 - $5,000 p.a. As well as BRIC (Brazil, Russia, India, China), countries like Indonesia, The Philippines, Egypt, Columbia and Peru are all expected to go through this threshold in the next 30 years, with consequences for dietary change, discretionary consumption, financial services, housing and healthcare 

The $18 trillion p.a. increase in EM consumption offers extraordinary opportunities for businesses, from the humblest local entrepreneur to the largest multinationals. From Coca-Cola to Nissan, most multinationals have well-developed strategies to meet growing EM demand. European listed companies now derive over a quarter of their revenue from EMs, so not all beneficiaries of EM trends will be EM companies. And while it might seem intuitive that local, EM companies would be major beneficiaries of local growth, this is often not the case: many companies listed on EM stock markets make a large proportion of their sales in developed markets and rely on Western demand for their products (often manufactured goods or commodities).

So there is quite a difference between companies which benefit from fast growing EM demand and those EM supply companies which deliver to the slower-growing developed markets (DM). Not only do EM supply companies suffer from the slow growth in the DM, but they also have to cope with the fast rise in wages and other costs in the EM.

Investors hoping to capture the benefits of the EM opportunity have the choice of investing in EM listed companies through an EM fund (recognising that it does not perfectly match the opportunity) or buying exposure within a global equity portfolio, picking out the beneficiaries irrespective of where they are listed.  For those integrating EM into their global equity investments, the MSCI All Countries World Index is fast growing in popularity as the new standard global equity index. ACWI includes the EM in its calculation, whereas the traditional MSCI World Index does not. Currently, companies listed in EM account for about 14% of ACWI. Sarasin & Partners offers the choice to clients, both with a dedicated EM fund and by including the beneficiaries of many EM trends in our successful thematic global equity funds.

Whichever investment approach is selected, the inexorable process of convergence in living standards is creating extraordinary long-term demand growth, and multiple opportunities for investors.

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Henry Boucher

Fund Manager and Deputy

Chief Investment Officer, Sarasin & Partners LLP

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