Triangulating a Truer Course Through Emerging Markets
Where can you find a car market which will double in size in the next five years? Brazil and Russia might be obvious places to look, but would you have expected Chile, Colombia, Ukraine and Vietnam? Picking the next big themes in emerging consumer markets is even harder than in the well-researched developed world. To get a better handle, we think, requires a triangular approach.
Traditional methods of filtering out consumer plays from emerging-market indices will concentrate undue attention on companies with entrenched market positions, often merely throwing up yesterday’s winners. We believe a better way is to approach the process from several angles. The best outcomes will then be where they all converge, rather like a navigator taking several bearings from a ship to find their position in order to navigate unknown waters.
Our first bearing is taken from historical patterns of development in a range of emerging and developed economies. Historical parallels in one country can give us insights into how the market for a particular product or service will develop in another. We have mapped consumption patterns for no less than 30 products and services over the past 20 years or more in 50 economies. What we seek are “s-curves”: where the chart of the penetration of a product describes an s-shape, pushed sharply higher by some catalyst such as higher incomes, before flattening off again.
Mass-market cars provide an excellent illustration of how this approach can provide valuable insights. Our extensive analysis suggests that once gross domestic product reaches about US$6,000 a head (on a purchasing power parity basis), sales of cars really start to take off. So China is currently in a sweet spot, standing where Korea was four years after it reached its own inflexion point.
The problem with relying solely on s-curves is that history does not always repeat itself. So our second approach seeks contemporary parallels. This means taking a snapshot of more than 50 countries at different stages of development and then analyzing how consumers’ expenditure might evolve. For instance, the annual growth in expenditure on cars in China slowed to about 18% in 2012, which consensus forecasts assume will continue. However, our research suggests that, over the next three to four years, the Chinese will become as wealthy as the South Africans, Malaysians and Mexicans are today and that growth in car spending will then bounce back to around 24%.
Just to be sure of our position, we take a third bearing on the consumer. This involves looking at the penetration of consumer goods in three developed markets to see what that suggests about their emerging counterparts. We take a “vertical” slice through the income spectrum of the US, UK and German populations to see how demand changes as affluence increases.
Take the UK, where spending on vehicles by the wealthiest 10% of the population is more than 17 times that of the poorest. Transferring this knowledge to China, we expect “trading up” to add four to five percentage points to annual car sales there as people become richer. This confirms the insights on the Chinese market we gleaned from other emerging economies referred to above, reinforcing our conviction that expenditure by the Chinese on cars will soon be heading back to 23% or more (Display).
By using all three of these approaches in a process of “triangulation,” we believe it is possible to forecast changes in trends with much greater accuracy. This should, in turn, help us to better navigate emerging consumer markets, where we expect to find some of the fastest global growth over the next few years.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Tassos Stassopoulos manages Global Growth/Thematic Portfolios at AllianceBernstein