Profiting from the Global Growth of the Middle Class
While much of the text in American newspapers talks about the declining level of the middle class domestically, investors might be missing the greatest growth of wealth in history.
As investors, our goal is to determine which firms will report strong and growing corporate earnings. With much of the world increasing its wealth at a rapid rate, companies with international revenue and corporate earnings should do well over the next several decades.
According to the Boston Consulting Group, there will be approximately one billion middle-class consumers in China and India by 2020. While it took Britain 150 years during the Industrial Revolution to double income per capita (America took 30 years), China and India are moving at a much faster pace. (Source: “The Emerging-World Consumer Is King,” The Economist, January 5, 2013, last accessed February 15, 2013.)
This explosion in the global middle class will mean a massive increase in consumer spending for items that most North Americans take for granted. For companies that are able to serve this consumer spending demand over the next few decades, corporate earnings should rise substantially.
Some companies that immediately come to mind include Unilever PLC (NYSE/UL) and Kraft Foods Group’s international division, Mondelez International, Inc. (NASDAQ/MDLZ).
An increase in consumer spending by this growing middle class will drive corporate earnings for firms that can provide everyday items of better quality as well as snacks and foods that are beyond the basics needed for life to function. For life to exist, no one needs to drink a can of Coke or eat an “Oreo” cookie. And the hunger for sugary treats is not limited to American consumers.
As this giant middle class starts to make more money, their consumer spending habits will also include going out for meals. This has been the growth strategy for YUM! Brands, Inc. (NYSE/YUM), as a huge portion of their corporate earnings stems from international markets, including China.
There are always possible issues and problems when dealing with other markets, including safety. At its Chinese restaurants, YUM! Brands is currently dealing with health issues related to the excessive use of antibiotics and hormones in its chickens. The real questions a long-term investor needs to ask are: can this company eliminate such behavior, and will consumers return to YUM!’s restaurants over the next decade?
These are just a couple of examples of firms looking to monetize the upcoming increase in consumer spending from the massive enlargement of the global middle class. There are many opportunities for corporate earnings to grow across various segments.
As an investor, look around you and see the type of consumer spending occurring near you. Much of what we take for granted when it comes to consumer spending is now seen as a luxury item for hundreds of millions of people.
As soon as their income increases to a level where they can now afford such things as facial cream, better shampoos and conditioners, or even refrigerators, they will be more than willing to consume these goods. If you didn’t have an air conditioner and lived in extreme heat, would you not be inclined to buy one if you had the funds? Many things that will drive consumer spending globally for decades are items that we take for granted now.
The huge number of people that will move into the middle class over the next decade also means that there will be a larger number of wealthy people. Consumer spending in luxury goods will also drive corporate earnings for the high-end firms.
Already, China is one of the world’s top markets for many luxury items, including high-end vehicles and Swiss watches. Ferrari sales in China have more than doubled from 2010 to 2012. China was the fifth-largest market for Ferrari in 2010; now it has become the second-largest, with Ferrari Chairman, Luca di Montezemolo, projecting that growth will continue over the next five years. (Source: “Ferrari: Torrid pace in sales growth continues,” China Daily, November 26, 2012, last accessed February 15, 2013.)
Imagine the level of consumer spending and possible corporate earnings when hundreds of millions of Chinese citizens become middle-class.
An investor looking to the future must, to some degree, look past the daily news stories and see the changing demographics. It is easy to get caught up in the latest good news or bad news, missing the big picture.
Even if the estimate for the total number of middle-class persons by 2020 is not exactly one billion people, it will certainly be a significant number. The trend is clearly for economic growth worldwide, which means increased consumer spending and larger corporate earnings for companies that can provide goods to consumers internationally.