Middle class expansion in emerging markets was presented. Key points included:
1) The emerging market middle class is projected to grow significantly over the next decade, surpassing developed markets, with an estimated $20 trillion in annual spending by 2020.
2) Emerging market consumption is growing rapidly, driven by the middle class, with China and India representing over 60% of the expected $6 trillion in additional consumption from 2010-2013.
3) Emerging markets are transitioning from low-cost exporters to domestic consumer markets, with China now the largest consumer market for automobiles, luxury goods, and internet users globally.
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2011 Cabot Investor Conference - Middle Class Expansion
1. Middle Class Expansion in the
Emerging Markets
Presented by:
Rob Lutts, President & CIO
Tim Moore, CFA, Portfolio Manager
Dennis Wassung, CFA, Portfolio Manager
3. United States versus China
TAX POLICY IN USA TAX POLICY IN CHINA
– U.S. corporate tax high – Very immature tax policy
– City, State and Federal – No real estate taxes
sales tax, capital gains, – Low corporate taxes
social security tax, – Low income taxes
dividend tax and more
– No social security tax,
– We are not undertaxed only modest obligations
4. United States versus China
US Debt Burdens China Government
Large and Growing Finances are Strong
• US has debt close to 90% of • Total government debt is
GDP much less than US – estimates
• Off balance sheet obligations around 40% of GDP
of Social Security and • Average Chinese citizen
healthcare could be larger avoids debt
than $14 trillion debt • Foreign Exchange Reserves
• US attitudes toward debt are are over $3 trillion
excessive • China has flexibility
• So, US debt could be 2X GDP
5. Incentives for Entrepreneurs are High
• High rewards and much wealth are there for those who
take risk in growing capital.
• Government policy encourages capital investment.
• Tax policy is favorable for investment.
• Infrastructure costs are low in China.
• Cost structure still very favorable for all businesses to
move operations to China. Two reasons:
1. Lower costs
2. Enlarge potential markets
6. China and Many Other Emerging Markets
Favorable for Capital Growth
• Over past ten years, Emerging Markets outperformed
developed markets by 10% per year.
• We anticipate this to continue once money comes back to
equity markets.
• China will eventually open up its currency, and this will
help China grow – fully convertible currency.
• China continues to take advantage of global
opportunities – buying in Brazil, Greece, and other
troubled areas.
8. Early Innings of Growth
• Young Stages of Urbanization & Localization of Brands,
Services, Products. Vast “Window of Opportunity” ahead.
• Middle Class = 2b people w/ $7 trillion annual spending
could reach $20 trillion in 2020 (2x that of US today).
• EM Population living in cities might grow +45% next 20
years.
• GDP growth of EM is 3x that of Developed Markets for 2011
& 2012 expectations (+6% vs 2%).
• Not just an “outsourcing” region anymore. They are
developing their own technology and innovating.
9. Myth versus Reality
Myths Reality
• It is a lot of people, but not • EM is 55% of world’s GDP
much economic growth growth and 45% of GDP but
• Only speculators or risky only 17% of World Mkt Cap
people invest there! • EM had record $95b inflow in
2010 for Equities
• Those countries have so
much debt! • EM has the least amount of
Debt/GDP of any region
• Their stocks do not perform
better than Developed • EM stocks outperformed US
(S&P 500) by 12%/year on
countries
average over last 10 years
• Currency is too volatile
• Broad basket of EM nations
reduces Currency Risk
12. What Else?
• Credit Cycle, Urbanization & Home Purchasing affects ALL
industries. “Halo Effect” lifts growth of Retail, Construction,
Energy Needs, Infrastructure, Banking, Healthcare.
• Multinational Companies only average 11% of sales
exposure to EM (highest are Nokia, Nike, Suzuki, Hyundai,
Boeing, Anheuser-Busch, Philip Morris Intl).
• Much better accounting practices & disclosures today.
• Supportive valuations of stocks along with dividends.
• Strong balance sheets and raising rates to curb inflation.
18. China’s Auto Market Is Now World’s Largest
10-Year Compound Growth
of 24% -- 2M to 18M units!
19. China Healthcare Industry
10-Year Compound Growth of ~16%
$350 5.0%
4.9%
$300
4.8%
$250 4.7%
4.6%
$200
4.5%
$150
4.4%
$100 4.3%
4.2%
$50
4.1%
$0 4.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
China Healthcare Expenditures (US$, billions) % of GDP (RHS)
20. No Longer Just “Made in China”
• China is now estimated to be the world’s largest
consumer of luxury goods – with 22% share of
the 2010 global market @ $13 billion (overtaking
Japan)
• China’s Retail Sales of Consumer Goods growing
17% versus GDP growth of about 9.5%
• China’s Automobile Sales topped the U.S. in 2010,
becoming world’s largest car market
• World’s largest Internet user population, leading
to growing eCommerce industry