The rise of the middle class
Demography is a key driver of economic growth and projections from the United Nations indicate that the global population could increase by an additional 2 billion people by 2050. But the striking figure is the expected 1.5 billion people joining the middle class in Asia only. This additional population will come with a significant purchasing power (spending of at least USD 12’000 per head) which should provide an extra spending of around USD 18.5 trillion over the next 5 years. This may bring a radical change in the way investors pictures the emerging market story.
Emerging markets will have a significant domestic market on consumers and will become less dependent on developed markets, both from an international trade perspective and from a capital/financing standpoint. This trend by itself means that global trade as a percentage of global GDP could decelerate without taking into account the increasing tensions around trade and tariffs. It also means that emerging countries will be able to rely on a broader tax base which, in turn, would likely increase their debt sustainability and their capacity to finance the development of infrastructure and public services.
From an investment standpoint, the following sectors and themes should benefit the most from these radical changes:
- Discretionary consumer goods and premium brands.
- Consumer services: tourism, banking, insurance, home services, telecommunications, and e-commerce.
- Fundamental needs: housing, transport, education, health, and elderly people dependency.
- Smart city/urban life: water, electricity, waste management, and air treatment.
Technological leadership is moving to Asia
The trade war between the US and China over the past 12 months has shown China’s growing influence in world trade. Beyond the tax increases between the two countries is a battle all the more important – world technological leadership.
The past decade has experienced a progressive shift in technological innovation from the US and Japan to China with the birth of technology giants in mainland China. While Chinese companies have historically been dubbed as copycats for their capacity to replicate western products at a lower price, they are now at the forefront of innovation in many areas. A number of Chinese start-ups have developed into major global players in technology, from mobile to e-commerce, to social networks to emerging industries such as financial technology.
Alibaba Group, for example, has 860 million global active users, including 730 million in China alone. Tencent Holding’s WeChat counts 1.1 billion users. According to Forbes, 4 out of the 7 largest internet services and retailers in 2019 by revenue all reported high double digit sales growth.
This shift in technological leadership should not come as a surprise. First, Chinese companies can count on a very large and relatively protected domestic market with a population totalling more than 1.4 billion. On top of this, China has massively invested and changed its economy from a pure manufacturing powerhouse to a leader in tertiary industries. Services now account for the majority of China’s GDP. Given the importance of technology, the race for leadership in this area is not just about economic dominance but the reshaping of world geopolitics. Notwithstanding the lag in Europe, even the US may lose its technological crown to China.
January 20, 2020