Fast food, fashion and skin care – who are China’s new consumers?
China alone will add $US2.5 trillion to global consumption in a decade
A clear trend
According to the OECD, the global middle-class will surge to 3.2 billion by 2020 and 4.9 billion by 2030, from just 1.8 billion in 2009.
Most of the growth will come from Asia. Some 66 per cent of the global middle-class, and 59 per cent of middle-class consumption, will come from Asia by 2030. In 2009, Asia represented just 28 per cent of the world’s middle-class and 23 per cent of consumption.
In China alone, the middle-class will double to about 500 million people in the next decade. Their average annual income will rise from around US$12,000 to more than US$20,000. That will add a massive US$2.5 trillion to global consumption.
Limited exposure through local stocks
The first impact of the rise of the Asian middle-class was the surge in demand for Australia’s commodities. That phase has matured. We are now focused on what we call "second-degree impacts" of the growing Asian middle-class consumption in areas such as healthcare, education, food and consumer goods.
(Editor’s note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this article).
There are ASX-listed companies with exposure to this trend. Seek, for example, is aggressively expanding into Asia, through zhaopin.com in China; the company wants half its revenues to be generated from there in the near term. Ramsay Health Care has expanded in China after striking a partnership with hospital operator Chengdu Jinxin Healthcare Investment Management Group. The company will look to invest in specialty facilities in the Chinese hospital market.
There will also be some additional opportunities in tourism and hospitality, education and infrastructure. But overall, Australian companies do not give Australian investors a lot of exposure to the emerging Chinese consumer.
Big multinationals will win
You could buy the major Chinese companies operating in high-growth markets, which I think will be protected by the Chinese Government. That includes state-owned telecommunications company China Mobile, which is listed on the NYSE and Hong Kong Stock Exchange, and NASDAQ-listed web services company Baidu.
But I believe the best way to gain exposure is through the big international brands. The rising Asian middle-class will help multinational firms in industries such as fast-food, pharmaceuticals, IT and communications.
I like Yum! Brands, which operates 41,000 restaurants in 125 countries, with brands such as KFC, Pizza Hut and Taco Bill. In China alone, Yum! opened 737 new restaurants in 2014, taking the total to 6715 stores (including 4828 KFC outlets). It expects to open another 700 stores in 2015.
Quality of life and aspirational product providers, such as Proctor & Gamble and Johnson & Johnson, may also benefit. Johnson & Johnson has operated in China for decades. It began selling its baby care products and expanded to women’s healthcare products, skin care and oral health products such as Listerine. The company has a number of manufacturing facilities in China and an innovation centre in Shanghai.
I like major financial institutions such as MasterCard, American Express and Visa. They will be able to leverage the growing consumerism and online buying of the middle-class. Major technology and digital players, including Microsoft, IBM, Facebook, Apple and Samsung, will also gain.
Luxury product companies such as Burberry and Louis Vuitton may also benefit from the emergence of an aspirational class.
Why the falling Aussie dollar can help overseas investing
Coupled with changing demographics, the movement of the Australian dollar can act as a tailwind to your investment. For the past few years I have advocated investors allocate a portion of their portfolio to international stocks. One of the main reasons was the prospect of a weaker Australian dollar.
I believe the Australian dollar has a lot further to fall to match the declines in the prices of our major commodities, particularly iron ore and coal. Investors may also be looking to diversify away from the Australian market, which is dominated by banks, property securities and resources.
Risks vs reward
Remember, investing has risks and in China there are more than the normal valuation risks that challenge equity returns all round the world.
(Editor’s note: Heavy falls in China’s sharemarket in June and July 2015, after strong gains in the preceding 12 months, highlighted the potential volatility in emerging markets).
In China, the risks are political and regulatory. China is on a massive transitional journey, but it is managed for China’s own betterment. So international companies that enter and trade inside China will always be subject to changing rules and regulations.
Invest in the major markets of Asia including China, Japan and Hong Kong. Trade through your broker in Australian dollars and settle in CHESS.
There are 17 different Asia focused funds available on ASX covering single market, multi-market and sector specific investment themes.
There are 3 broad fund structures available – Listed Investment Companies, Exchange Traded Funds and mFunds.