Saturday, September 18, 2010

Logical New Theme in Emerging Markets: Consumer Products for the rapidly growing Middle Class

It will be difficult - if not impossible - to find investors who do not believe that structural growth in Emerging Economies will outperform that of the West. True, there is a bit more disagreement when it comes to translating this into the conclusion that Emerging stocks will therefore outperform Western ones. As always: be careful to be on the side of 'all or most' investors when filling in your strategic portfolio.

So, this translates then into a need to look for 'new' or 'different' sub-themes within the general, structural trend. One of the most interesting ones is that almost all investors believe that the middle classes in Emerging countries will benefit tremendously from the structural growth in their economy. Example: Mercedes is now selling more luxury cars in China than in the US. Another example: Rolex is now featuring Chinese as on of the important languages on their website. And even Ferrari is making it clear that the Chinese market is key for them.

But it is not just China. Other Emerging countries will also see spectacular growth in their middle classes. And after years of excess savings for later (in countries where pensions and other type of insurance are hardly present) these people will now start spending. Bringing down their savings ratios at a time when incomes and salaries are growing rapidly as well. That double effect in combination with the law of large numbers (about 80 percent of the people in the world live in developing economies!) translates automatically in a situation in which a fund specializing in the equity of firms from Emerging Markets focusing on consumer products (production and / or trading) is an interesting one.

Booming Middle Class Wealth in Emerging Markets: Mall in Russia
The only uncertainty for those creating the fund is how to distinguish between the winners of the future and those that will loose out to more prestigious imported brands from abroad. But that risk is not so high. In many cases it will pay for those foreign competitors to buy into a struggling local provider if the latter has a sufficiently large market share and/or other advantages. In some countries the structure of the market is such (regulation that limits foreigners) that they don't have another choice than to opt for this model.

In summary: Richard Kang, CIO of the firm that brings us the ETF investing in Emerging Markets consumer products (Emerging Global Advisors) is NOT bringing us a pure marketing story here (Fund code ECON ) . His Forbes article about the booming opportunities in Emerging Markets consumer products is one that LMG wholeheartedly agrees with. To such an extent that we put his fund on our own buy list as well.
Click here for Richard Kang's original Forbes article.

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