Four Sectors Deserve Middle Class Investors’ Attention

Four Sectors Deserve Middle Class Investors’ Attention
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OCEAN CITY — The consuming class may be the world’s next big engine of economic expansion. We believe that in a world with lower-for-longer interest rates and underwhelming growth, the roughly 4.5 billion people at the base of the economic pyramid may be a critical factor as a significant portion of them enter the middle class.

The bottom billions earn only $1 to $10 a day, but have $5 trillion in purchasing power and $7.4 trillion in wealth, according to BofA Merrill Lynch (BofAML) Global Research. They are urban, young (60% under 30), educated (12 years of expected schooling), connected (there are two billion Emerging Market Internet users) and have more disposable income than ever before. Bottom billions consumers and households, while still poor, are experiencing improving living conditions and standards, and are looking increasingly middle-class.

The rise of the bottom billions may drive middle-class spending from $5 trillion today to $56 trillion by 2030 and $84 trillion by 2050, according to BofAML Global Research. China and India are expected to be the greatest drivers of the shift in consumer spending to EM through 2050 and the growth in those expenditures. India is expected to be the number-one nation of middle-class consumers by 2050, growing from 1% of total spending in 2009 to 31% by 2050.3 The top 12 EMs are expected to account for 33% of global consumer spending by 2030, according to BofAML Global Research.4 While food and non-alcoholic beverages account for the largest portion of consumer expenditure for these 12 nations, we are also seeing growing demand for transportation, entertainment and media.

We believe the current digital revolution will be instrumental in transforming the lives of the bottom billions. In fact this technological revolution is reaching and permeating EM economies and societies at a much more rapid pace than previous ones and is creating rapid, sustainable and resource-efficient growth. We find it intriguing that more EM households have a mobile device than electricity or a supply of clean water.

The Information & Communication Technologies (ICT) sector’s enablement of economic growth through enhanced productivity could boost EM gross domestic product by $2.2 trillion, according to BofAML Global Research. Financial inclusion a driver

Around two billion adults globally don’t have access to basic financial services; by 2020 this number is expected to be halved. In EMs, only 54% of adults have an account at a financial institution or via a mobile money provider vs. 94% in high-income developed markets. Digital finance is likely to play an integral role in enabling financial inclusion for the bottom billions. Recall that in 2014 Narendra Modi, prime minister of India, issued a national mission statement to serve the unbanked. The number of mobile wallets in India is now double the number of credit cards and the market size is expected to accelerate in coming years. The global market for mobile money is expected to grow to $78 billion by 2019, while financial inclusion is seen as a $380 billion opportunity for banks.

The global healthcare sector is expected to grow from $7.3 trillion currently to $10.3 trillion by 2020, with EMs driving demand.

While the rise of the bottom billions poses potential opportunities, it will not be easy. In 2015, 14% of the world’s population still lived in extreme poverty (on less than $1.25 per day), 2.4 billion lacked access to proper sanitation, 795 million went chronically hungry and 780 million adults were illiterate, according to BofAML Global Research. Thus, inclusive growth will be key in reducing inequality of income and opportunity. We believe that governments, businesses and other stakeholders play critical roles in bridging the wealth gap and combating social unrest and instability.

(A Merrill Lynch Wealth Management Advisor who can be reached at 410-213-8520.)