How to invest early in new emerging market trends

Around 400 million millenials in China and India alone will drive a new phase of consumption in emerging market economies, according to the latest research from Goldman Sachs emerging market team*. Born in the 1980s and 1990s, these buyers grew up in substantially different conditions to the generations before them and will think, act—and buy—in totally different ways, the report says.

We often talk about the investment potential generated by growing wealth and a burgeoning middle class in the Asian region. Trends such as the diminishing influence of commodities and an increasing orientation toward the consumer and technology sectors are well documented. Equally relevant, however, are changing consumer behaviour and consumption patterns. Previously non-existent industries and opportunities are appearing, and, in years to come, these may well be where the best investment opportunities will be found.

The elastic band nature of emerging markets – and how to invest wisely

Changing priorities

Because living conditions have improved so substantially for many of these emerging market millennials, priorities that fully occupied their parents’ time, such as food, clothing and shelter, have been superseded by other things like health, beauty and experiences. They can choose to spend their money differently to past generations.

So, what and how are they buying?

Digitalisation and leisure

It goes without saying that the internet has been one of the most disruptive forces around the world over the past two decades. And the shift to online retail has been one of the major ramifications. Previously, analysts worried that large ‘informal’ economies would inhibit online retail growth in many emerging markets. However, e-commerce and mobile payment transactions are growing at a rapid rate – particularly among the powerhouse nations like China and India.

In China, for example, overall e-commerce penetration has surpassed the US and millennials specifically are making upwards of 40% of their purchases online†. In India, the number of mobile payment transactions is estimated to grow from 2.9 billion last year to upwards of 450 billion in five years‡. India’s aggressive demonetisation of higher value rupee notes at the end of last year may have helped to speed up this transition.

Meanwhile, spending on recreation and leisure is increasing. Chinese consumers in this age group are visiting neighbouring south east Asian countries like Thailand, for example, in rapidly growing numbers, boosting tourism in that country. Emerging market millenials are also starting to do all the things developed market Gen Ys have been doing for years: eating out more often, focusing on ‘well-being’, and spending on education and self-improvement. This last category could be quite broad an may include better clothes, beauty products, furniture and homewares – as a group, the millenials are aspirational and willing to pay up for quality, Goldman Sachs’ emerging market team suggests.

How to invest early

All these industries are still largely underrepresented in traditional market-cap weighted benchmarks, at least relative to the potential impact they could have on future growth. As a case in point, China is likely going to become the largest cinema box office market in the world this year and has been expanding at a rate of over 20 new cinema screens being added a day and yet there is not one cinema operator in the MSCI China index§.

I’ve always advocated that emerging markets are an area where active investing is especially valuable. Tomorrow’s winners won’t be those of today and it is only by going beyond the generic universe of market indices that will investors be able to properly capture these early stage growth opportunities. The best active emerging markets managers spend a lot of time on the ground, researching firsthand the companies into which they invest and the market drivers.

Funds I particularly like that exemplify this approach include Goldman Sachs India Equity Portfolio and First State Greater China Growth for focused country exposure. For broader access to emerging economies, Charlemagne Magna Emerging Markets Dividend offers something different with its income focus, while Lazard Emerging Markets has been a strong long-term outperformer with a deep research team resource behind it.

*Goldman Sachs Asset Management, Emerging Markets Equity Market Update, August 2017
†Goldman Sachs Global Investment Research, The Asian Consumer: Chinese Millennials, September 2015 [quoted in GSAM EM Equity Market Update, August 2017]
‡ India ASSOCHOM, M-Wallet: Scenario post Demonetisation, December 2016 [quoted in GSAM EM Equity Market Update, August 2017]
§GSAM, FT (as of 10-Mar-16) and Guardian (as of 1-Apr-16) [quoted in GSAM EM Equity Market Update, August 2017]