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

Advertisements

Bitcoin & Remittances: a Match Made in Heaven

I recently penned this little piece for my economics class, and I thought it might be cool (in a great, nerdy sort of way) to share– especially given the fact that my campo mom, who receives money each month from her son in the States, and I discussed the topic over our beans and rice this weekend.  Did I mention that I love studying abroad?


 

We live in a world that is consistently being revolutionized by travel and technology. Our 21st century eyes have seen many gloriously new things, but we also cannot help but notice the suffering that still exists in this world and the tug on our hearts to do something about it. What many don’t realize is that this is a fundamentally economic concern as well. We ought to harness our latest technology, the mobile payment systems and cryptocurrencies, to help alleviate our most ancient problem, world poverty, through remittances. Remittances are the funds sent home by migrant workers and they currently are entangled by many restrictions. In this article, I will illustrate the current problems regarding remittances, how remittances and bitcoin (the most popular cryptocurrency) make a great pair, and why everyone should care.

Perhaps your civic-minded friend emailed you the link to Dilip Ratha’s TED talk or very possibly you know someone who sends money home each month, but hopefully by now it is self-explanatory to extoll the virtues of remittances. They alleviate poverty and allow the receivers to stimulate their local economies most effectively—thus providing a mutually beneficial exchange that traditional foreign aid never could replicate. So what are the two major obstacles currently facing this system? The first is the exorbitant fees charged for sending and receiving the money. Remittances are a huge financial market, totaling up to $414 billion in the last year, and The World Bank confirms that, “cutting prices by at least 5 percentage points can save up to $16 billion a year.” That is an extra $16 billion in the households who need it the most, spending and investing it in the economies that need it the most. I believe that it is high time for developed countries to realize that we can best assist developing countries simply by harnessing the power of remittances and removing the current barriers that prevent impoverished families from receiving the hard earned money of their relatives. This is where bitcoin, the digital currency that lends itself to an innovative payment network, comes in. Ken Miller, the COO of Gem and advisor to Square, defends bitcoin in an article published earlier this year, “Given the inherent near-zero cost of bitcoin, if it never had any other application in the world other than to eliminate these double-digit fees and get most of that $5 billion in the hands of people whose lives would be dramatically improved, then that’s a problem worth eradicating with this solution.”

Frustratingly, the second hurdle is regulatory compliance. Start-ups are itching to revolutionize the expansive remittance market by marrying it with cryptocurrencies and mobile payments, but as recent article from CoinDesk notes, “Obtaining a license in the US is the single largest barrier to entry into the remittance industry and explains, at least partially, why there has been so little innovation in the space. BitPesa tellingly opts to avoid the issue altogether and doesn’t accept customers from the US at all.” BitPesa, one of the many recognized bitcoin remittance services, is forced to leave the US (by far the largest sender of remittances) out of the picture. Innovators can only go so far, now it is up to the countries to cooperate in easing the flow of remittances.

Why should everyone care? Aside from the human desire to help our neighbors, the answer comes down to simple economics. We ought to encourage remittances in developing foreign nations because they create wealth and generate trade, thus growing the economic pie. Through increased trade and competition, everyone is ultimately better off. Not only that, but it is clear from innovative companies—think Square, Apple Pay, and even Snapchat—that the mobile payment revolution is happening around us. It is time that we recognize and harness its potential for doing good in developing nations. As consumers, producers, and compassionate human beings, it makes sense for us to throw our weight behind the union of remittances and bitcoin. Let’s do our civic duty by exerting pressure on our governments to cooperate.

Learning a Million New Things Everyday

Yesterday, the Comunidad 19 participated in an engaging tour of Centro León, feasted on “La Bandera”, and sang Prince Royce’s “Las Cosas Pequeñasen nuestra clase de español. While this was all wonderful, the real unexpected treat for myself came after dinner in the form of a casual talk by the Dominican Director of ILAC. He began per usual with his background, talking about how he grew up as the youngest of eight brothers on a farm, worked hard in a factory, educated himself enough to own his own farm, and how he now helps run the ILAC center by teaching the campesinos, or Dominican countryside farmers.  As soon as the words “opportunity cost” came out of his mouth during an example, the economist in me was hooked. Rightly so, because it was at this point that he began to speak about the economic differences in the Dominican Republic, and how it was important for our Comunidad to observe the differences but keep in mind that there was most likely an unnoticed rational behind them. “Observe, but not judge,” he repeated over and over as he described how they no longer took American groups to tour the factories where people worked, since in the past people had staunchly objected to the fact that the Dominicans were working such long hours and being paid only about $1 per hour. He pleaded that we do not realize that Dominicans are able to stretch that weekly $50 to support themselves better than we could imagine, since we Americans frankly have little clue about the art of being frugal in a developing country. He added that some people once suggested that the government double the minimum wage, but that this would be completely counter productive as it would cause the factory to relocate to another more lucrative country, leaving behind poor and now job-less workers. The way to break the poverty cycle was not through free handouts, but rather through supporting jobs and education. And here I will interject, because earlier in the day, on the sunny ILAC rooftop, I had read the universal proposition derived from that exact logic. It was a great hour during which the principles that I held by my own reason and logic, here specifically faith in the free market, were confirmed by a completely foreign source who had also arrived at the same principle, but through sheer personal experience. I mentioned in the last post that I had recently read Fr. Sirico’s wonderful book, Defending the Free Market, and found it informative and logical. Here is an important portion from his chapter on foreign aid that was unknowingly repeated almost verbatim during yesterday’s discourse:

“What then can wealthy nations do to assist developing countries? First, don’t make the matter worse by encouraging corruption and governmental irresponsibility, which is exactly what government-to-government aid tends to do. Second, stop undercutting businesses in the developing world by flooding their markets with free goods year after year. Save emergency aid for genuine emergencies, and when you rush in to help, see if there are any local producers already there with whom you can partner to source emergency provisions. Third, open the world’s markets to the businesses of emerging economies. As things stand today, many Western nations practice the confused and contradictory policy of protecting domestic firms through tariffs and subsidies–thereby shutting out the products of developing nations–and at the same time sending billions of dollars in tax money to developing nations to supplement their failing economies. This is the misguided strategy we have used to ‘develop’ Haiti for the past few decades. Is it any wonder Haiti’s people are still struggling to develop?”

The director, a neighbor and eyewitness of Haiti, added vibrant language of his own and described the foreign aid as “handicapping” the Haitians– they don’t need free things, he said, rather they hunger for education so that they themselves may be creators. Work allows individuals to have the necessary responsibility, independence, order, and sense of purpose in their lives. If you truly want to help people and break the cycle of poverty, advance education. And so I climb (through my loathsome mosquito net) into bed tonight feeling content. Content because while La República Dominicana and this experience outside of my comfort-zone has already embellished my surface interests (e.g. bachata music, yuca, siestas, etc.) my core beliefs stand not only unshaken, but triumphantly confirmed. But the best part yet: my Comunidad and I have the privilege of being a part of this legitimate foreign aid since, beginning next Monday, we will be teaching English in three different schools throughout the semester. Here’s to learning–now hopefully teaching–a million new things everyday. 🙂