The Growing Middle Class Creates New Markets

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Includes: DEM
by: Wall Street Daily

By Carl Delfeld

The Growing Middle Class Creates New Markets

Despite all the doom and gloom about globalization on the run, it's important to keep in mind what this international movement has meant to the world over the past three decades.

In 1990, half the population in emerging market regions lived on less than $1.25 a day, and 25% were in extreme poverty. Now, only about 10% live in extreme poverty, the literacy rates among youth have climbed to 91%, maternal mortality rates have declined by half, while the incidences of malaria have declined 47% - not to mention that polio is close to being wiped out, entirely.

The world is much more connected and urban. There are 7 billion cell phones out there, and 3.2 billion people are now connected to the Internet. This is a growth of 800% since 2000. There are twice as many people in emerging market countries than in developed countries with Internet access. For the first time, there are more people living in urban rather than rural communities, with 538 cities worldwide having a population over one million - 101 of these cities are in China.

Risks on the Rise

The threat of terrorism, however, continues to linger as deaths by terrorist acts have increased 80% in 2015. Five countries alone account for 78% of deaths: Afghanistan, Iraq, Nigeria, Pakistan, and Syria. To keep things in perspective, world deaths by homicide were 13 times that of acts of terror. Additionally, it is a bit troubling that 1,370 tons of enriched uranium are stockpiled around the world, as more countries scramble to obtain nuclear potential.

Perhaps, the most overlooked risk in the world is the rising tension and confrontation in the South China Sea through which $5.3 trillion worth of trade passes through each year. It is a crowded neighborhood and the stakes are high. It is also worth keeping an eye on the rise of state capitalism over free market capitalism over the last decade. The number of countries such as China, Russia, Thailand, and Brazil in which 30% of the economy is owned by the state, is rising.

This is particularly true in the areas of telecom, natural resources, banking, aviation, shipping, and autos. Some of these states have the trappings of democracy but, in effect, are authoritarian societies more closed than open to the world.

Emerging Blue Chips

Offsetting all these risks is the rising global middle class - a theme that should be at the core of any investment portfolio. Ogilvy & Mather has put together a great report on these high growth markets - which it calls "velocity markets."

Driven by global trade, technology, urbanization, and demographics; the middle class in emerging market countries makes up almost half the population of such. In 1980, only 1 billion people in the world could be classified as middle class. That number is now over 4 billion and is projected to rise to 4.9 billion by 2025. This rate of increase is producing a sense of optimism on a global scale, as more of the Earth's inhabitants now have access to disposable income and more stable financial growth.

Ogilvy believes that the next decade's growth of new middle class consumers will be surprising as it predicts that India will be adding 397 million consumers to the market. Not to mention there are estimates of 50 million in Indonesia, 187 million in China, 20 million from Vietnam, and 37 million in Bangladesh.

This polling indicates that 70% or more of the people in these countries are set to expect positive change in their financial stability over the next decade. But where will these new consumers be spending their money? The priorities are predicted to be children's health, education, better housing, and an increased spending on nutritious food.

Investors need much more exposure to these emerging and frontier markets but the strategy has to be active, with close attention paid to value and risk. Some of the big multinationals listed on the S&P 500 Index are growing with these markets just fine, but surprisingly, Ogilvy found a growing preference for local brands.

Hitting Close to Home

Total Revenues of Top 100 Players in 63 Sectors: Emerging-Market Companies Have Grown Three Times Faster Than Mature-Market Companies

Given rough parity in quality, Brazilians, for example, favor local brands by a 7-to-1 margin and Indonesians picked local brands an amazing 10 to 1 times. The takeaway here is that investors need more direct exposure to local consumer companies in order to make the most of the internationally growing middle class.

  • Research from the Boston Consulting Group projects that, between 2015 and 2030, the population of emerging markets is set to expand by 17% - more than three times faster than the rate in mature markets.
  • Even if GDP growth slows to 5%, China and India will add $3.7 trillion in consumption over the next five years - equal to the entire GDP of Germany.
  • Ultimately, emerging markets will account for one-third of global consumption by 2020.

The easiest and smartest way to capture the growth of emerging blue chips is through the WisdomTree Emerging Markets High Dividend ETF (NYSEARCA:DEM). This is a basket of blue chip emerging market stocks with a consistent history of dividend increases. While the trend has years to mature, this is a development that should not be ignored.

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