Western brands benefiting from consumption in emerging markets
On the second anniversary of the JPM Global Consumer Trends Fund, Peter Kirkman, the fund's manager, says that its outperformance is largely due to three key themes that are revolutionising consumer spending globally, namely, demographics and urbanisation, health and wellness and aspirational trends.
Peter Kirkman, Manager of the JPM Global Consumer Trends Fund comments: "As emerging markets continue to see an increasing trend towards higher living standards and urbanisation, consumption patterns are changing - Western brands are benefiting greatly from this with already well established business models and distribution channels."
The OBSR A rated fund has returned just over 40% since launch (in April 2008), compared to the MSCI World Index which has returned just 9% over the same period. The fund aims to profit from shifting human behaviour including changes in what people buy and how they live. It offers broad based access to these long-term patterns which are a result of ageing populations, migrating workforces and changing buying patterns in the East and West. Global consumption currently stands at $30 trillion yet Kirkman is not concerned whether this rises or falls, instead he focuses on identifying the long term trends of where that money is spent.
Demographics and urbanisation:
It is expected that the global urban population will grow from a current 3 billion people to 5 billion by 2030 (United Nations estimates). As such, living standards are expected to rise for those moving to urban areas creating a wealth of opportunities for companies providing a range of products and services, such as processed foods, hygiene products or affordable apparel. One example of this is China Hongxing which has 452 stores in China, selling low-cost sports footwear and apparel under its Erke brand.
The proportion of retired versus non-retired people is also changing. For example, in Japan in 2005, 30% of the population was of retirement age. This compares to a projected 50% by 2020. As this shift takes place, consumption patterns will change. Companies such as Zimmer, which specialises in hip and bone therapies, will be a beneficiary in these circumstances as hip replacements become more commonplace.
Health and wellness:
As people strive to live longer and look better, health and wellness becomes an important area of consumption growth that the fund also taps into. For example, increasing demand for organic food versus declining demand for carbonated soft drinks. In emerging markets, health and wellness is about access to basic everyday products that people in the West would take for granted, such as tissue paper and nappies. There are 20 times as many babies in China as there are in the UK and most of them are still not using disposable nappies - that is a lot of incremental new demand.
Aspirational trends:
The fund also taps into growing aspirations in emerging markets. Kirkman says: "In countries like China and India, there will be a very strong growth in middle class urban consumption expenditure for many years to come."
The fund does not only invest in emerging market stocks - it has a global remit. Kirkman adds: "Even though the portfolio is driven by bottom up stock selection, we always consider overall market conditions. Although we believe the Chinese consumption story will run for 20 years or more, valuations in the region are not as attractive as they once were. Because of this, we currently prefer to gain exposure to the overall growth story through western companies profiting from the vast changes occurring in the region."
The brands that fall within this category range from Gucci to local producers of trainers and sporting gear, which, in some cases, have better penetration than international brands such as Nike.
Playing these themes provides a globally diversified portfolio, but with the benefit of access to the emerging market growth story, which is undoubtedly an important area of further growth over the long term.