The growth in global consumption will be driven mainly by emerging markets in the coming decade. The OECD predicts growth in Asia of no less than 571 percent between now and 2030, predominantly on the back of strong growth in China, India and Indonesia. How can investors use this to their advantage?
Investors can select companies directly from emerging markets. But it can also be interesting to invest in Western companies that generate a large proportion of their revenue and profits in emerging markets, such as Richemont (luxury goods, Asia), Colgate (toothpaste, Latin America) or SABMiller (beer, Africa and Latin America).
When making direct investments, you have to make sure that the companies involved stand out from the crowd – by having a superior product or as a result of clear cost advantages or economies of scale. There should also be sufficient transparency in how the company is managed. This is important because the provision of information by companies in, for example, China and India is often less efficient than in Western countries.
A current prominent example is the Chinese internet sector, which by coincidence looks a lot like the US internet sector. Where companies like Google, Facebook and Amazon occupy a dominant position in the US, their counterparts Baidu (search engine), Tencent (social networks and communication) and Alibaba (e-commerce) have a leading position in China. The Chinese government is an avid supporter of what it calls ‘local champions’. The government is able to monitor and control these local companies better than non-Chinese players, and such quasi-monopolies are also highly profitable. So investors in one or more of these companies can profit from the growth in this attractive sector, while the risk of the Chinese government turning against you is relatively small. This is a reassuring thought.
India also offers attractive investment opportunities. Due to the lack of good infrastructure, mopeds and motorcycles are the most popular form of transport. The market for two-wheelers is dominated by local parties, mainly because production is cheap compared to Western competitors. In addition, the Indian players produce real ‘commuter bikes’ that are used for daily commuting, while international players like Harley Davidson focus more on motorcycles for leisure purposes.
According to the consultancy firm Bain & Company, China has been the largest luxury goods market since 2012. The dominant suppliers of luxury brands are based mainly in France and Italy (leather goods), or Switzerland (watches). By investing in similar international players in emerging markets, you can benefit from the growth while still avoiding pitfalls such as unclear information or weak corporate governance.
Companies from emerging markets make an attractive addition to an investment portfolio, given that the underlying factors that drive growth differ from those for developed market investments. The growth rate in emerging markets is higher and these markets offer diversification. However, although it is important to carefully manage the potentially higher short-term risks, in the long term the companies that are able to position themselves to fulfil the wishes of the emerging markets consumer will definitely be rewarded.
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