Emerging Market Consumers Want It All

Bob Froehlich Hartford Investor October 19, 2011

"I Want It All" is a song by the English rock band, Queen, featured on their 1989 album, The Miracle. The song was released as the lead single from the album on May 2, 1989, and reached number three on both the U.K. Singles Chart and the American Billboard Hot Mainstream Rock Tracks chart. There's probably no better song in the world that captures what's going on with emerging-market consumers today than this one. These people truly want it all.

As investors, it's important to step back from the daily investment noise that focuses on the latest developments with current crises such as Greece, China's currency wars, or recent numbers for U.S. employment and housing. I'm not making light of these investment issues; they are important, and they'll have a great influence on our market's direction in the short run. However, when we worry too much about the short run, we forget to focus on some longer-term trends that may have a greater influence on where our markets are headed in the long run. One of these longer-term trends just happens to be the emerging-market consumer.

Before I jump right into my bullish case for emerging-market consumers, allow me to set the stage and show you how important they've become to the global economy. Emerging-market consumers are now more important than the once-almighty U.S. consumer. All you need to do is look at global consumer spending. In the year 2000, U.S. consumers accounted for 35% of global consumer spending, while emerging-market consumers only accounted for 22%. In 2010, U.S. consumers fell below 30%, while emerging-markets consumers rose above 30%. My good friends and colleagues at International Strategy & Investment in New York forecast that by the end of 2011, the emerging-markets consumers will account for 34%, while the U.S. consumers will account for 27% of global consumer spending. I think it will be even more dramatic, as I forecast that by the end of 2011, U.S. consumers will account for less than 25%, while the emerging-markets consumers will make up more than 35% of global consumer spending.

Right about now, you might be asking yourself, "How in the world is this possible?" It's because the emerging-market consumers are no longer emerging—they've emerged. To realize how this dramatic shift happened so quickly, all one has to do is to look at consumer spending (retail sales) numbers for some of the key emerging markets at the halfway point of this year.

Before I go through retail sales numbers for particular emerging-market countries, let me give you numbers for the U.S. to give you some perspective. In the U.S., economists get excited if our annual retail sales numbers are between 3% and 4%.

At the halfway point of 2011, on a year-over-year basis, retail sales were up by double digits in seven emerging-market countries: Hong Kong +28%, Vietnam +20%, China +17%, Russia +15%, Poland +14%, Brazil +12%, and South Africa +10%. Retail sales were up 5% or more in six additional countries: Estonia +9%, Thailand +8%, South Korea +6%, Chile +5%, Hungary +5%, and Mexico +5%. There may not be a more important trend for our global economy than the emergence of the emerging-market consumers.

One of the keys to this global, emerging-market consumer boom is simply that these people now have money to spend. Wages are rising across the board in all emerging-market economies, and this is putting more money in the pockets of consumers. Let me show you what I mean by focusing on the largest, and most important emerging-market economy: China.

Almost every provincial government in China has increased its official minimum wage over the past year, with hikes averaging +20.6%. This is critical as it sets the base rate for all consumers. In addition to these minimum wage increases, 51job.com conducted a survey showing that in 2011, 89% of companies will raise salaries by an estimated 8.4%. This level is higher than in 2010, when salaries increased by 7.9%.

Beyond these cold hard facts are a few anecdotes that help paint a picture. Honda is increasing salaries by 33% at its Honda motor parts supplier facility in Fushan, China. Wages for workers in all of the Chinese factories belonging to a company called Foxconn were raised 30% on June 1, 2011. Foxconn also raised wages 30% for its workers in Shenzhen, China last July. My point here is that no matter how you look at it, emerging-market consumers now have money to spend, and spending is exactly what they're doing.

As investors, this leads us to the next logical question: If emerging-market consumers now have money to spend, where are they spending it? In my opinion, they're spending it on strong global brands. When people have money to spend, they tend to spend it on products and names that they've heard about their entire lives. Companies with strong global brands are best positioned to benefit from the global emerging-market consumer boom. Luckily, a company called Interbrand, which started in 1974, does an annual ranking of the "Best Global Brands." While this is obviously not an exact science, their rankings are considered the "Bible" in the world of advertising and marketing so, as investors, we should at least take a look.

The most recent rankings available from Interbrand are for 2010. While the company actually ranks the top 100, I decided to simply focus mainly on the top 10. (You knew this was coming as I'm truly a top-10 kind of investment strategist.) When you look at the top-10 Best Global Brands for 2010, you find that nine of the 10 are from the United States! Nokia from Finland, ranked number eight in 2010, is the ONLY non-U.S. company among the top-10 global brands for that year. In 2009, Toyota was the only non-U.S. company in the top 10.

Top-10 Best Global Brands

My point is that if global brands really matter, some of the biggest winners of this emerging-market consumer boom could be companies in our own back yard—companies right here in the great United States of America. This is especially true if you add in some of the great American brands that didn't crack the top 10, but were recognized as part of the top-25 global brands: Gillette at number 13, Apple at number 17, Pepsi at number 23, and Nike at number 25.

By the way, here's an interesting side note to consider. The two largest emerging markets in the world today, China and India, both failed to land a single company on Interbrand's top-100 list of best global brands.

I'm not recommending that you buy any particular company stocks. However, I am recommending that you sit down with your trusted financial advisor tomorrow and look at your investment portfolio to see if you're positioned to potentially benefit from these emerging-market consumers who "Want It All."

As always, let me bring this commentary to a close with one of my customary pearls-of-wisdom quotes. This one's from Larry Summers, former Secretary of the Treasury and Harvard University president: "It says something about this new global economy when the USA Today now reports every morning on the day's events in the Asian markets." What this says to me is that the global emerging-market consumer boom could actually help markets in the United States too—all because of, as Larry Summers put it, "this new global economy." One thing that's not new, and will never get old, is this: "Have a great day, keep a positive attitude, and please join me in resolving to remain a long-term investor in a short-term world."

One final point—I've changed my mind. I want you to meet with your financial advisor TODAY, not tomorrow. You remember the chorus to the song, "I Want It All," don't you? "I want it all, I want it all, I want it all, and I want it NOW."

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The views expressed here are those of Dr. Bob Froehlich. Dr. Bob Froehlich's views are not necessarily those of The Hartford and should not be construed as investment advice. They are subject to change. All economic and performance information is historical and does not indicate future results.

Dr. Bob Froehlich's sources of information include Bank of Canada, The Bank of England, Bank of Japan, Bloomberg News, Business Roundtable, China Investment Corporation, CIA. World Fact Book, CNBC, Congressional Budget Office, Deutsche Bank, The European Monetary Union, Federal Reserve Board, The Financial Times, Freddie Mac, FOX Business, Goldman Sachs, International Monetary Fund, International Strategy & Investment, Journal of Commerce, Merrill Lynch, PIERS Global Intelligence Solutions, Strategas Research, Thomson Reuters, Union Bank of Switzerland, U.S. Census Bureau, U.S. Department of Commerce, U.S. Department of Labor, U.S. State Department, U.S. Treasury Department, The Wall Street Journal, and The World Bank.

PAST ECONOMIC PERFORMANCE DOES NOT ENSURE FUTURE RESULTS.

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All information and representations herein are as of 10/11, unless otherwise noted.

P6170_101711 107819 10/11

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