What This Thai Tennis Coach Can Teach You About Emerging StocksBloomberg News
Consumer discretionary shares driving emerging-market rally
Health, e-commerce, travel, fun: the trends to keep watching
When Samak Srisarakham first came to Bangkok as an 11-year-old with his older brother, he slept in bare-bones communal bedding next to a tennis court. He could barely imagine growing up to a life of fancy restaurants, new clothes and the latest electronics.
Yet 30 years later, he’s a tennis coach in the Thai capital, and a perfect illustration of what former Goldman Sachs Asset Management Chair Jim O’Neill calls “the biggest story in the world” when it comes to investing: the rise of the emerging-market consumer.
Originally from a poor town in rural northern Thailand, Samak owns three properties and two cars. His two daughters go to an international school and the family has an assortment of smartphones and tablets.
“People used to give me clothes and stuff before, but now I buy at Uniqlo and some other local stores,” he says. “I also spend money on extra education for my daughters, like tutoring classes. We go out to eat at a restaurant probably once a month with the family.”
Rags-to-riches stories like Samak’s are key to some of the biggest equity gains in emerging markets this year. Stocks of consumer discretionary companies -- those that sell products people buy with disposable cash after meeting basic necessities -- have jumped 23 percent in 2017 and are valued 33 percent above their average price-earnings ratio in the past 10 years. Under the radar as gains in technology shares grab the limelight, they’ve helped put the MSCI Emerging Markets Index on track for its best year since 2009.
“Consumer spending is a solid driver of growth across emerging markets, particularly within Asia,” said Angelo Corbetta, head of Asian equity in London at Pioneer Investment Management Ltd., which oversees the equivalent of $256 billion.
While poorer countries suffer from infrastructure shortfalls, e-commerce is filling the gap, helping boost consumption by taking away the need for buyers to visit bricks-and-mortar shops. Corbetta says that “consumption trends have changed dramatically over the past years with online sales penetration improving with the rise in the number of digital users.”
The boom comes amid a golden period for many emerging markets, which have so far proven resilient to Federal Reserve’s withdrawal of monetary stimulus, along with a swath of geopolitical crises that could have kneecapped risk appetite. That could still change -- a renewal of global financial turmoil could trigger an exodus of capital, and some countries’ high household debt burdens could cause spending to tumble if borrowing costs climb.
But for now, the backdrop for emerging-market discretionary shares has seen them reach the highest premium in six years over consumer staples: that’s retailers like supermarkets, makers of cleaning products and food manufacturers. The shift is mostly thanks to Asia, home to a rapidly expanding middle class -- a flexible definition that captures personal spending of $10 to $100 a day depending on the country.
A closer look at 2017’s best emerging-market consumer discretionary stocks is revealing:
So where to next for the emerging-market consumer juggernaut? Here are some key trends on investors’ radars:
Samak, the Thai tennis coach, is part of a wider shift in Southeast Asia, where the middle-class population could more than triple over the period from 2012 to 2030, according to Oxford Economics and Haver Analytics.
While Southeast Asian consumers “are not yet in a big way buying luxury cars or Louis Vuitton handbags, their aspiration to acquire luxury goods will eventually catch up and drive future growth,” says Arthur Kwong, head of Asia-Pacific equities at BNP Paribas Asset Management Asia Ltd. in Hong Kong.
More money means more fun. Sports gaming, travel, restaurants and tourism are all areas that are set to benefit, says Trinh Nguyen, a senior emerging Asia economist at Natixis SA in Hong Kong.
With Asia -- China in particular -- at the forefront of mobile payment use, Internet stocks in the region will continue to hold appeal as a consumer play, says Corbetta at Pioneer. These shares “are a lucrative way to gain exposure to the rise of the growing middle class” through businesses from mobile gaming and social media to travel and cloud computing, he said. Pioneer likes NetEase Inc., a Chinese mobile gaming developer, South Korea’s Naver Corp., a search engine that has diversified into e-payments, and Shanghai-based e-commerce player Baozun Inc.
Health and the Environment
Social media has put the latest trends in the hands of anyone with a mobile phone. So even things like the developed-nation preoccupation with healthy food and exercise can penetrate to emerging markets, says Joshua Crabb, head of Asian equities at a unit of Old Mutual Plc. in Hong Kong. He had an a-ha moment in a cab on the Indonesian island of Bali, when the driver said he was cutting back on rice as part of a low-carb diet.
“Even if you can’t afford certain things, you are very aware of what’s healthy, what’s not healthy. Very aware of what’s environmentally friendly and what’s not,” Crabb said.
— With assistance by Yumi Teso, Emma O'Brien, and Lisa Pham