The developing world is home to over 80% of the world’s population and it is expected that annual consumption in emerging markets (EM) will rise from US$12tn in 2010 to US$30tn in 2025. Put simply, in less than 10 years’ time EM will account for around 50% of global consumption.
The changing dynamics of global consumption
Greg Konstantinidis, Fidelity EMEA Fund
“The key to EM growth is education coupled with job creation. Given labour arbitrage and low per capita consumption, job creation is expected to accelerate, widening EM and DM growth differentials.”
Between 1965 and 2010, the working age population in Asia increased by over 20%. This led to Asia experiencing a sevenfold increase in its GDP per capita1, the so-called “Asian Miracle”, with South Korea and Singapore particular beneficiaries. India and Indonesia are currently in this phase.
While an increase in the working population across EM is clearly good news, what’s equally important is the urbanisation of this workforce. This helps drive formal consumption as these economies move away from traditional open markets and ‘mom-and-pop’ stores towards supermarket and convenience stores.
Jobs in urban areas also tend to be much more productive for the economy than jobs in agriculture. They usually call for higher levels of education and many EM governments are now looking to encourage enrolment in tertiary education. A number of international companies are now looking to tap this increasing talent pool while also benefiting from labour arbitrage.
For example, a software engineer’s salary in Indonesia is 8% and in India is 11%2 of the comparable salary paid in the US.
Nick Price, Fidelity Emerging Markets, EMEA & FAST Emerging Markets funds
“The Chinese consumer economy remains robust and we have exposure to a variety of companies which stand to benefit from the associated increase in demand for consumer goods and services. New Oriental Education, for example, is a company that prepares students for university entrance, while Techtronic is a leading manufacturer of drills and vacuum cleaners.”
Finding the winners
While the rise of the EM consumer is a powerful long-term theme, some companies are clearly better placed to benefit than others. At Fidelity, we tend to favour market leaders which operate in under-penetrated areas with significant structural growth potential.
Although many companies can deliver high returns in the short-term, the sustainability of those returns is what’s really important. We have a clear preference for companies that demonstrate the ability to fund their own growth strategy without having to raise funds either through dilutive equity raisings or by issuing debt. Management incentives are also closely monitored as it is vital that their interests are fully aligned with ours as minority shareholders.
1 Drummond, Thakoor & Yu (2014). “Africa Rising: Harnessing the Demographic Dividend”, IMF Working Paper.
2 Source: Jefferies Company note “EPAM Systems”, SourcingLine, 11 December 2014.