Joint research from Clime & StockInValue Investment Team
This observation is not new; it is well documented that Asia is predicted to undergo a significant lift in per capita income for the next decade. This is captured in the following chart created in the Australian Government White Paper titled, ‘The Asian Century’.
Figure 1. Asian economic resurgence to continue
Source: Australian Government White Paper – The Asian Century
The magnitude of the growth is best illustrated by comparing the outlook for income in China with that of the US. China today has an economy estimated in size at $11 trillion. It has about 1.3 billion people and per capita income approximates $8,500 per person. The US economy is around $17 trillion and it has 330 million people. Per capita income in the US approximates $50,000 per person.
The gap in per capita income between the world’s largest and second largest economy can only get smaller. Their respective per capita income will not meet in the next 50 years, but China’s per capita income will grow at multiples of that of the US. If China can maintain GDP growth of 6% per annum for the next 12 years, it will have an economy that approximates $22 trillion in 2025. At that point, per capita income will lift above $17,000 per person.
The lift in per capita income, spread widely across the economy, will lead to a substantial lift in consumption of food, goods and services. The demand for imports will grow at a rate higher than underlying economic growth. In recent years, China’s trade has grown by 10% per annum and the Chinese economy is transitioning from being capital investment driven to a mega consumer/trade cycle.
Figure 2. China’s merchandise trade ($bn, seas. adj.)
Source: CEIC, Capital Economics
With that, one of the world’s most powerful investment themes is the rise of Chinese consumers and their appetite for brands. China is the world’s second-largest but fastest-growing economy and its middle class is emerging rapidly. At the high net-worth end, we have seen research stating China produced a new billionaire every week this year. The vast wealth creation in China is creating hundreds of millions of new consumers who will want to wear branded apparel, sample new food and beverages, drive the latest cars, own the newest tech accessories and travel worldwide.
What is noteworthy and hardly surprising is that there are no Australian brands in the list of the 50 most sought after Luxury Brands in China.
Figure 3. Most sought after luxury brands in China in 2012
Source: Digital Luxury Group
Many of the brands in the list reside inside listed companies that trade on European, US and major Asian markets. Some of these companies trade on lower price multiples and yet generate higher returns on equity than Australian companies. In offshore markets an investor is spoilt for choice, whilst in Australia we are saturated with financial stocks and domestic-focused retailers. Importantly, we have no significant manufacturing base and whilst we have some successful brands, they are generally small and privately-owned.
Some stocks set to benefit are:
Figure 4. Per capita disposable income
Source: Clime Research; Thomson Reuters Datastream
Yum! Brands (YUM.N)
The owner of KFC, Taco Bell and Pizza Hut also owns Asian franchises like Little Sheep and East Dawning. Yum is rapidly expanding in China and India.
The British spirits house, which owns market-leading brands such as Johnnie Walker and Smirnoff, has made strategic investments in China and India. Chinese consumers prefer spirits to wine and beer and Diageo’s diverse spirits portfolio positions it to benefit.
Estee Lauder Inc. (EL.L)
Estee Lauder owns many prestigious cosmetic brands in categories from affordable luxury to aspirational. It has already done well in other developed Asian countries, indicating a strong understanding of the Asian consumer.
Disclosures: Clime Asset Management (Clime) owns YUM.N and DGE.L on behalf of various mandates where it acts as an investment manager.
Missed our previous research on some of the world’s most investable themes? Catch up at:
Theme 1. Effect of US interest rates
Theme 2. Information Technology: Today’s fastest growing sector?