Asia’s consumption boom is a theme MoneyWeek readers will be familiar with, and others are catching on too. David Budworth notes in The Sunday Times that one ‘mega-trend’ for the coming years is to invest in China’s ‘Generation Y’ – urban youth who are enjoying larger pay packets and more opportunities to spend as the economy booms. Chinese GDP growth was 10.7% during 2006, while urban incomes rose even faster, climbing 11.5% adjusted for inflation. Against that backdrop, it’s little wonder that in December year-on-year retail sales were up 14.6%.
It’s not just China. India too has strong growth figures, along with many others in the region, notably Vietnam (see: The exciting growth potential of Vietnam). And although Asia’s credit industry is still in its infancy, Merrill Lynch’s Karen Olney and Charles Cara believe that rising incomes are more than enough to get emerging market consumers hitting the shops. Also, unlike their Western counterparts, Asians still have money put aside to fuel their spending: the global savings rate, excluding the US, is 26%.
So how can investors profit from this boom? There are “comparatively few emerging-market consumer stocks”, say Olney and Cara, and they tend to be small firms. But you don’t have to buy into Asian retailers – several European consumer stocks generate a large proportion of their sales from the region, offering what Merrill Lynch reckons is the best way to buy into what is “likely to be a long-running investment theme”. The added benefit of playing Asia via Europe is that with eurozone growth also picking up, particularly as Germany’s recovery continues, there’s also the upside from European consumers rediscovering their wallets.
Merrill Lynch likes the look of watchmaker The Swatch Group (UHR:VX), which at 28% has the greatest sales exposure to Asia (excluding Japan) and trades on a p/e for 2007 of 19.7. Other picks include baby food and nutrition group Numico (NUM:AS), which trades on a p/e of 24.5, but is expected to see double-digit sales growth this year and next. Tobacco group BAT (BATS) is another pick. It gets around 18% of its sales from the region and trades on an estimated p/e for 2007 of around 14.9.