Emerging Markets Middle Class Is on the Rise, Ready to Spend

Demand for particular goods and services explodes in emerging markets once income levels cross certain thresholds, changes in per capita average income are also monitored. For instance, once the average income crosses $10,000 per year, car sales generally take off, and after the average salary exceeds $15,000 per year, people start demanding long-term savings products, a trend explained by the Acceleration Principle.

According to this theory, as average income rises, the number of people earning above average income accelerates well beyond the % increase in average income. So, in a country where the average income is $10,000 per year 2.3% of the population will earn more than $15,000, but when average income increases 25% to $12,500, the number of people earning more then $15,000 will jump by 600%.

Over the past year, we have seen the Acceleration Principle in action in China, where per capita income rose 10% but car sales rose about 50% in the first six months of 2010.

‘The Emerging Consumer’ Investment Theme

After we identified the “emerging consumer” as an investment theme, we conducted intensive research and applied rigorous fundamental financial analysis to identify companies that are likely positioned to benefit from the shift. Secondary and tertiary players that stand to profit from the ripple effects caused by social, demographic and economic changes were also identified.

For example, pharmaceutical companies that sell drugs for hypertension and diabetes in countries such as India and China are poised for future gains. Why? Because as people move to the city and their income levels rise, their eating habits often change in favor of processed foods high in fat and sugar. And, at the same time they tend to exercise less. These changes contribute to weight gain and obesity, increasing the risk for diseases such as diabetes.

In the last decade, as India’s economy grew 7% annually and 400 million people entered the middle class, the country also achieved another milestone: It became the country with the highest number of diabetics. Today, 7.1% of the population suffers from the disease. The average age of diabetes onset in India is 43, ten years younger than in Europe, and an estimated 1 million Indians are expected to die from the disease this year, more than in any other country.

Final Word

Of course, there are risks that all emerging markets pose, just as they did in Japan in the aftermath of World War II. Throughout many emerging markets today, political risks, terrorism, as well as the possibility for speculative bubbles raise concerns. And the “frontier” economies in Africa, the former Soviet Union, the Middle East and Latin America present additional challenges.

In these countries, instability, war, limited property rights, weak rule of law, poor infrastructure and/or rampant corruption may threaten to undermine economic growth. Yet even in light of these risks, we believe that the economic growth and demographic shifts many developing countries are experiencing create an attractive environment for investment. Through our emphasis on thematic investing, we are focused on identifying undervalued securities that we believe stand to benefit as the global middle class continues to grow.