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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 claimed that, in 2008, 47% of its sales were in developing and emerging markets, and it expected to see this figure increase as population, and purchasing power grew - particularly in Asia. Indeed, their sales volumes grew in these markets by over 3% during the first half of 2009.

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 10.7% in the fourth quarter of 2009 and grew by 8.7% for the year. Other emerging economies such as India have shown their resilience too, delivering robust growth of 6.7% 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 estimated to be about 40%, 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, increased sales by about 9% in China last year and counts China as its third biggest market. 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.