The Impacts From Global Consumer’s Emergence

Christine Selzer

Special To The Dispatch

OCEAN CITY – As signs of economic recovery emerge around the globe, many of the underdeveloped markets that once drove growth before the financial crisis are poised to fuel it once again. Much of the strength behind this recovery is coming from a new class of consumer. In China, for example, the National Bureau of Statistics of China reported that during the first half of 2009, the disposable income of urban and rural residents grew year-over-year by 9.8% and 8.1%, respectively. With China’s estimated population of 1.3 billion people, that amounts to a great deal of purchasing power.

China and its fellow BRIC nations — Brazil, Russia and India — are the markets experiencing the lion’s share of consumer expansion. In the process, they are playing a big role in reshaping the global economy and presenting a number of compelling opportunities for investors. In order to potentially reap benefits of this newfound consumer demand, it’s necessary to understand the factors driving it, and the risks involved.

In the BRIC countries — and in the smaller-scale economies of Mexico, Turkey, Indonesia and South Africa — consumers are spending their income on higher-quality branded household and personal care products as well as big-ticket items, such as appliances and automobiles. According to Michael Hartnett, Chief Global Equity Strategist, BofA Merrill Lynch Global Research, a major factor in this consumer demand is the broad structural and fiscal reforms that have stimulated growth and helped to keep inflation in check. Brazil in particular has experienced dramatic economic progress. In large part because of Brazil’s more conservative fiscal policy, its national inflation rate has fallen from 65% in 1995 to just 5% today. "Lower inflation in emerging markets has led to lower interest rates and easier credit for consumers," says Hartnett. "That makes it easier for these shoppers to purchase houses, cars and durable goods."

Lower inflation in these countries has also helped to generate higher employment rates and better wages. "As central banks in emerging-market nations have successfully used fiscal policies to control inflation, local businesses have gained visibility and are able to plan and even expand," Hartnett says. And the result is a rapidly changing wealth distribution profile, according to Bob Ford, a BofA Merrill Lynch Global Research Senior Analyst who covers consumer stocks in Latin America. "During the last five years, the proportion of consumer households with annual incomes of more than $12,000 has nearly quadrupled, along with a dramatic reduction in the proportion of Brazilians living below the poverty line," he says.

Hartnett notes that while the U.S. is at the tail end of a decades-long cycle of credit expansion, the emerging markets are just beginning to experience an upswing.

Many large multinational firms in North America, Europe and Japan owning well-known brand names are extending their reach into emerging marketplaces. For many investors, these companies offer a relatively easy way to expose their portfolios to consumer growth in developing countries. The sectors that stand to benefit include consumer staples, like cleaning products and fast food; commodities; health care products and services; automotive; and financials.

When evaluating multinational companies in these sectors, says Hartnett, investors should look for a healthy balance sheet and growing revenues. Just as important, however, is a management team with a track record of success in navigating the intricacies of local markets and effectively targeting local consumers. He also recommends that investors seek firms with strong distribution networks, which are essential for transporting goods and providing services to consumers in remote areas — vital market segments in many developing nations.

To be sure, stocks in these markets are often subject to a high level of volatility and require a relatively high tolerance for investment risk. Exposure to emerging markets, therefore, should be limited to a small percentage of an individual’s portfolio. Investors should also bear in mind that consumer-spending growth in these markets is an evolving process. If inflation rises significantly in these countries, for instance, it could stunt growth as consumers need to spend more for the same amount of goods and services. This effect could lessen the appeal of higher-value products in these markets. And as governments contend with the issues that accompany an expanding economy — such as the regulation of consumer credit — investors should be prepared for uneven growth and shifts in outlook for some sectors and specific companies. As a result, emerging-market investing is most appropriate for investors who can tolerate long time horizons and a relatively high degree of risk.

"We believe the growth of the emerging-market consumer is one of the best structural growth stories around," says Hartnett. "It’s an enormous opportunity."

(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)