The Emerging Market Consumer; Emerging Opportunity

Here is the simple reality: the past 200 years have seen the astounding rise of billions of the world’s population out of abject poverty. But that in itself is not the astonishing thing. The amazing fact is that this has been accomplished not by charitable endeavors, much less by governmental aid programs. What rescued hundreds of millions of people from the direst poverty? Simple, humdrum business.[1]

Zooming in to the present, this is precisely the phenomenon that is sweeping through the emerging market space, also known as the developing world. Specifically in Asia, we observe this to be truer than ever. Due to political, technological, economic, and social forces, 350 million workers in East and Southeast Asia have risen above the poverty line since 2000 and will be looking for ways to heighten their standard of living farther. Over the course of the next decades, the shares of global middle class consumption by China and India are set to escalate drastically, with much of their population surging to break through above the poverty line. This is clearly great news, as it means more families with food in their bellies, roofs over their heads, and income to spare on higher education, hobbies, sports, and the like. The great news for everyone is that wealth creation is not a zero-sum game in the least, and this rising middle class will present exponential opportunities for international businesses and investors as the discretionary income of Asia’s middle class increases.

Profile of the Emerging Market Consumer

“We are reaching a tipping point, where over the next several years the global middle class will expand dramatically. This is one of the most important features of today’s global economic landscape,” as the presentation “The Emerging Middle Class in Developing Countries” emphatically points out in its introduction[2]. This major step in development for a huge portion of the world’s population will begin a ripple effect of opportunity for the people themselves, local and global businesses, and investors across the world. There is a myriad of reasons that a strengthening middle class is the real key to sustainable growth for every economy, all deriving from two defining behaviors: the vigorous accumulation of capital, both physical and human, and the heightened demand for quality. Historical trends show us that this hunger for physical and human capital paired with added discretionary income will manifest itself in rising demand for household goods and services, housing, healthcare, and higher education while the accompanying demand for quality will lead to brand differentiation in consumer products, specialization across industries, and an amplified interest in social issues, environmental reform, and health concerns.

Emerging Opportunity for Investors

Who will benefit from this trend? One can easily predict this by entering the mind of the typical middle class consumer. In the emerging economies, it is reasonable to expect the discretionary spending to be targeted towards:

  • Global or local providers of goods and services that are consistent with the consumption patterns that accompany rising income levels, i.e. value branding, luxury goods, cars, etc.
  • Companies that provide the infrastructure to support this new growth, i.e. quality housing, roads, parks, etc.
  • Firms that will supply and innovate technology to cater to consumer preferences
  • Institutions for higher education
  • The tourism industry
  • Companies that distinguish themselves as being environmentally friendly and/or cater to an increased awareness of health concerns

This global trend extends promising invitations to investors of all philosophies—growth, value, fundamentals, technical, contrarian, and impact alike—to participate in the market. The timing of increased demand for these goods and services will be crucial to keep a diligent eye on. For emerging economies, consumer spending will not merely follow a linear pattern. The consumption of products will rapidly accelerate at the key moment when the majority of a country’s population can afford that consumer product.[3] On the investing side of this critical economic actor that we label “the emerging markets middle class consumer,” there are countless opportunities that present themselves given the individual investors preferences, risk tolerance, and passions.

Concerns

While an optimistic picture has been painted thus far, investors must be careful not to be over-romanced by the excitement of emerging market opportunities. It also pays to be aware of the risks that accompany such a shift in the global landscape, as with all human progress, instability is a part of the bargain. One of the foremost points of concern lies with the distinction between sustainable and unsustainable growth. Legislation protecting personal property, access to capital, and respect for human rights are all cornerstones of sustainable, real growth, which is the only path that will generate sustainable, real return for the investor. Another concern is a rise in protectionism, since some nations tremor at increase in competition and may foolishly react with increased tariffs or subsidies, thus slowing or even reversing growth in global trade.

Consensus

The rising global middle class consumer is an undeniable phenomenon and it is an excellent idea for investors to recognize that trend and look at how they can participate in the emerging marketspace, based on companies providing goods and services that cater to individuals who fall above the middle class income threshold.

[1] Rev. Robert Sirico, Defending the Free Market (Washington D.C.: Regnery Publishing, 2012), 48.

[2] Kharas, Homri, “The Emerging Middle Class in Developing Countries,” Development Centre Working Paper No. 285, O ECD, 2010.

[3] “Long-term Investing for Wealth Expansion: The Rising Global Middle Class” Ascent Private Capital Management, https://ascent.usbank.com/acp/pdfs/wealth_impact_planning/Ascent-Rising-Global-Middle-Class.pdf

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