June 2016, James Brown, Portfolio Manager
Between 1980 and 2010, over 600 million people moved out of poverty in China. As this massive group transitions into the middle class, they are bringing with them a greater disposable income thanks to better earning potential. These people might also be buying simple consumer staples such as toothpaste or packaged foods for the first time and therefore are predominantly driving sales and profits for consumer-facing companies. It is the speed of this change, especially for services and retail, that is important for investors to consider.
Coffee, tea or …
As China’s middle class grows, so does its tastes. This group is becoming more discerning about their brands of choice. Despite the economic slowdown seeing China experience its slowest GDP growth rate since 2009, its retail sales still grew more than 11 per cent in 20151. This is evident in the explosion of coffee consumption by this nation of traditional tea drinkers, so much so that Starbucks has announced plans to open 500 stores in China every year for the next five years2.
It is this trend that is infiltrating everything from fast food to travel and is creating opportunities for investors to tap into the rapidly growing obsession with all things consumption by China’s new middle class. For example, China Mobile is adding 20 million customers to its 4G network every month3 and with credit card use limited, hundreds of millions of smartphone users and businesses are now embracing mobile payment services4. In fact, in 2015, mobile transactions in the country more than doubled to $235 billion, pushing China ahead of the U.S.5 And while currently only around five per cent of the Chinese population have a passport6, the runway for growth in tourism is enormous – almost 10 per cent of international tourists worldwide are Chinese and they spend the most ($129 billion in 2013) with more than 80 per cent stating that shopping is “vital to their plans”7.
Meet the millennials
While China may be spending less on iron ore, its population spending on consumer goods continues to soar and will keep doing so. China today has 415 million millennials (those born in the 1980s and 1990s) and more college educated people under the age of 25 than over 25 due to the enormous boom in tertiary education in the last decade. Goldman Sachs estimate that in the next ten years, the aggregate income of Chinese millennials will grow by around US$3 trillion8. And with their technology consumption and e-commerce habits increasing, there are many great companies emerging to take advantage of these trends.
The time to consider China
Emerging markets tend to grow faster than developed economies, largely driven by China. They are creating significant opportunities for companies to generate strong returns, and while index level equity returns have been disappointing in recent years, these markets tend to be highly inefficient. The extreme volatility in the Chinese market in 2015 highlights that many stocks were not priced based on their fundamentals, yet some investors were actually able to take advantage of some of the significant mispricing.
Emerging markets will typically be more volatile than more developed equity markets. However, the inefficiency of markets, combined with the higher long-term economic growth rates suggests that there is the opportunity for solid long-term investment returns in these markets. For those with a long investment horizon (particularly those in accumulation mode), it is worth considering having at least an element of your portfolio invested in these markets.
1. H Wang, ‘China’s Middle Class Has Become A Major Pillar Of Its Economy’, Forbes, 19 January 2016, viewed 27 May 2016, http://www.forbes.com/sites/helenwang/2016/01/19/chinas-middle-class-has-become-a-major-pillar-of-its-economy/#33ee4708619e
2. L Burkitt, ‘Starbucks to Add Thousands of Stores in China’, The Wall Street Journal, 12 January 2016, viewed 27 May 2016, http://www.wsj.com/articles/starbucks-plans-thousands-of-new-stores-in-china-1452580905
3. China Mobile Ltd, viewed June2 2016, http://www.chinamobileltd.com/en/ir/operation.php?section=number&year=2015
4. J Osawa, ‘China Mobile-Payment Battle Becomes a Free-for-All’, The Wall Street Journal, 22 May 2016, viewed 27 May 2016, http://www.wsj.com/articles/china-mobile-payment-battle-becomes-a-free-for-all-1463945404
5. Osawa, loc.cit
6. The Economist, ‘Chinese tourists: Coming to a beach near you’, The Economist, 19 April 2014, http://www.economist.com/news/international/21601028-how-growing-chinese-middle-class-changing-global-tourism-industry-coming, viewed 2 June 2016
7. The Economist, loc.cit
8. J Lu, A Yiu, The Asian Consumer: Chinese Millennials, The Goldman Sachs Group, Inc. 8 September 2015, viewed, http://xqdoc.imedao.com/14fcc41218a6163fed2098e2.pdf, 2 June 2016