Investors shift focus to emerging market consumers

MONTREAL: Emerging markets have lost little of their luster -- despite concerns about Brazil, China and India overheating -- but investors are slowly shifting their focus from commodities to consumers.

Amid concerns about inflation in Brazil and a housing bubble in China, emerging market investors are becoming ever-more refined in their choices.

With the value of emerging market stocks estimated at 10 trillion US dollars, the economies of developing nations are no longer “monolithic,” Arjun Divecha, chairman of global investment management firm GMO, told a group of political and industry elites in Montreal Monday.

“The view we have is that we don’t have to think of emerging markets anymore as being monolithic. We can think of them as being segmented in various ways.”

“In broad terms,” Divecha argued, “we can think of them as serving three audiences. First the exporters. These are the people who make stuff and sell it to the rest of the world, outside of emerging markets. These are the companies that do well when growth is good.”

“The second group are the commodity producers. These are the companies that basically take stuff out of the ground, process it in some form and then sell it.”

“And the third group is the domestic market,” he told panelists at the International Economic Forum of the Americas.

The prevailing thinking is that “given what’s happening in the US, in Europe and in Japan, it’s hard to see that we’re going to have really strong growth over the next few years. And with commodity producers, their performance in some sense will be dependent very much on commodity prices. And so therefore it’s somewhat of a crap shoot.”

Divecha said that companies that serve domestic demand -- such as cell phone manufacturers -- will therefore outperform exporters and commodity producers.

“Are people in India going to have more cell phones? The answer is yes,” he told a panel of experts discussing strategies for investing in emerging markets.

“When poor people in poor countries get richer, the first thing that they do is to save. But at a certain level of wealth, people save less and consume more.”

Divecha said the shift from saving to consumption has unpredictable consequences in the market.

The so-called “sweet spot” of consumption in emerging economies is between $3,000 to $10,000 per capita GDP, he claimed.

“”This is where we see the massive non-linearity of the market,” he said.

In China, per capita GDP reached $1,000 in 2000. In 2010, when it reached $3,000 the growth of car sales grew exponentially, from one million to 17 million. In the next five years, when per capita GDP reaches $6,000, some 460 million people will be able to afford a car.

“How many people actually forecast that China’s car sales would actually be 15 million or 17 million? Zero. And that’s the point. The point is that non-linearity of demand is very difficult to forecast.”

He also said that a changing demographic picture was also benefiting emerging economies. In the 1960s and 70s, for every 100 people of working age, another 80 of non-working age were being supported. Now, the proportion of working to non-working individuals is 100 to 50.

The demographics are now improving and contributing to a “dramatic demand in consumer goods.”

Philippe Maystadt, President of the European Investment Bank, said emerging economies have proven resilient and developed “cushions to mitigate the impact of the shock of the financial crisis, pointing out that strong capital inflows have returned since mid 2009.

Some of the growth in emerging markets over the last decade has been nothing short of astonishing, experts said. In Brazil, China and India, the stock market hit double and triple digit gains since 2000. The gains convinced many investors that the developing world -- despite governance challenges and perceived riskier lending practices of banks -- was the real engine of the global economy.

But in the big emerging economies, growth has now cooled due to inflation-fighting efforts.