We believe that one of the most compelling investment opportunities over the next few years is likely to be in companies that serve domestic demand in emerging markets.
Our case rests on two underlying and interconnected forces – one economic and the other demographic. As poor countries get richer, they save as much as they can. Savings rates usually rise until countries reach a range of $3,000-$10,000 of gross domestic product per capita. Once in that range, savings rates begin to decline and consumption becomes a larger part of GDP growth as society starts to provide a social safety net. At this level of wealth, per capita consumption of all goods and services rises in a highly non-linear fashion. For example, while Chinese per capita GDP quadrupled from $1,000 to $4,000 during the past decade, car sales rose from 1m vehicles per year to more than 17m. Markets rarely anticipate this kind of non-linear growth.
Half of all emerging markets (by market capitalisation) are now in this sweet spot of shifting from savings to consumption. Further strengthening the economic case is a shift in demographics: a record number of people are coming into their earning years in emerging markets at the same time as baby boomers are starting to retire in the developed world. As a result, we believe that the world is in the middle of a massive shift in demand from the developed world to emerging markets.