Weapons of massive consumption
Whether you are a central banker, government official, chief
executive officer or simply the hard working owner of a corner
shop, monitoring consumer behavior during these uncertain economic
times is crucial. There is clear evidence western economies
have reduced their retail spending and this has created significant
risks to the sustainability of any economic recovery. With US
consumer spending accounting for 71% of US GDP, corporate earnings
growth across many sectors will be subdued unless new markets can
be accessed. Policymakers have decided this imbalance in the
world’s economy can be addressed if consumers in the emerging
nations can take up the baton from their US and European
counterparts and start to spend. This, in turn, has created
attractive opportunities for investors wanting to take advantage of
this growing theme.
The impressive growth of developing nation economies has already
lead to a marked change in domestic consumer behaviour.
Collectively, economies are now in a much stronger position
supporting the often quoted theory of ‘decoupling’, which means
such countries are beginning to grow their economies without the
over-reliance on developed nations. The demographics of these
countries are also very supportive for improving prosperity.
The population of China, Brazil, India and other Asian economies,
together with their rising middle classes and Western-educated
children, mean the developing world ‘consumer’ cannot be
ignored. Policy initiatives to stimulate domestic demand
coupled with rising incomes are now driving the earnings of many
global consumer good producers. Unilever claims that in 2008,
47% of its sales were in developing and emerging markets, and it
expects to see this figure increase as population, and purchasing
power grow - particularly in Asia.
China is by far the largest of the emerging nation economies by
population size and, following the collapse in world trade, it has
introduced a raft of stimuli to boost domestic consumption.
Aggressive infrastructure spending, coupled with far reaching
health care, education and pension reform, has meant that China has
remained an attractive investment opportunity. With the US,
Japan and all of Europe suffering the worst global recession in 30
years, China has demonstrated it can continue to grow its economy,
even through very challenging times. The Chinese economy grew
8.9% in the third quarter of 2009 and is now expected to grow by 8%
for the year. Other emerging economies such as India have
shown their resilience too – economic growth has only decreased by
2.1% since 2008 and is expected to deliver robust growth of 5.4% in
2009. This compares very favourably to the negative
year-on-year growth in the US and UK for example.
If we return to China as a case study, the central government
launched a four trillion yuan ($586 billion) economic and fiscal
plan and a further 850 billion yuan ($124 billion) spending plan to
expand and revamp an inadequate health care system. As
mentioned previously, money has been put to work on infrastructure
– new roads, railways, airports, gas pipelines etc - and also on
stimulative measures such as distributing pre-paid cards to
encourage consumer spending. Additionally, the government
instructed the banks to have a more open approach to lending, in
order to stimulate the economy. The household savings rate in
China is in excess of 30%, very high by western standards, with
households saving their money for healthcare and education.
As a result of the stimulus package the Chinese have been
encouraged to spend, not save, their disposable income on items
such as cars, fridges, televisions etc. In the West we view
these goods as basic items, however, for many Chinese these are
still considered luxury goods. Demand for these ‘items’ is
expected to increase significantly as households grow wealthier and
western consumerism takes hold.
At Fairbairn Private Bank, the ‘developing nation consumer’ has
been an investment theme we have been committed to for a number of
years. The events of the last 12-18 months, combined with the
initiatives introduced by domestic governments, have reaffirmed our
belief that this theme has the potential to create attractive
long-term investment returns. The ‘core and explore’ approach
we adopt with our discretionary investment management services
facilitates the access to this and a number of other investment
themes as part of the ‘explore’ element of portfolio
construction.
In closing, perhaps one of the most powerful indicators of the
spending power of the emerging nation consumer was the new Porsche.
The premium brand, German auto-maker, expects to sell more of its
cars in China than in Germany over the coming year. In a
country where year-on-year car sales have leapt by 80%, all that
tax payers’ money powered into western car companies recently may
not quite be the waste many critics thought.