Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Rahul Sharma, managing director, Neev Capital.
Austerity and anaemic growth are the norm in the developed world, with unattractive demographics, high unemployment and inflation sapping spending power. Conventional wisdom has it that inflationary pressure in India and China will choke off both consumer and business demand. But this view isn’t quite right.
In India and China, high inflation should be viewed in the context of favourable demographics and high growth rates. Due to rapid wage growth, consumers can absorb inflation better than their Western peers. Indeed, firms such as Unilever are raising prices there with relative ease, yet struggling with far smaller rises in the West. The median age in India is 25 and in China 34, far younger than the EU’s 40. India will add a staggering 178 million people to its workforce by 2030, accounting for 30% of the world’s total.
Boosting prospects further is the lift in per-capita income accompanying this trend. Already, the number of middle-income households in rural India outnumbers those in urban areas and their rising aspirations are being fed by access to global media, making it possible for consumer brands to build a following. The ranks of the wealthy are swelling too. China is expected to have more than 100 million households earning $10,000 per year within a decade, outstripping America. As incomes rise, so should consumer spending.
Fears of a global slowdown hitting China and India completely miss another key point. India is sheltered because two-thirds of its economy is driven by domestic consumption. China is also determined to re-orient its economy towards higher consumption and away from export-led growth. Both countries may have a deeply embedded culture of saving, but the younger generation wants Western-style consumption, and is even embracing debt, albeit in a cautious manner. So despite consistent tightening by the central bank, Chinese retail sales were up 17% in August.
Opportunity knocks for a host of consumer goods and services in these markets. So far, China, well on its way to becoming the largest luxury goods market in the world, has made the headlines. However, some key industries are not even scratching the surface of India’s ‘keeping up with the Patels’ culture. Its retail markets are forecast to grow from $400bn to $700bn by 2015, throwing up huge opportunities for Western retailers. Here are three firms I like.
Brilliance China Automotive (HK: 1114)
is BMW’s Chinese partner. Luxury car brands in China enjoy strong brand equity but are capacity constrained, so Brilliance is producing at capacity and enjoys high pricing power. This should drive strong cash-flow growth.
Richemont (VX: CFR), the luxury goods conglomerate, whose products include both watches and jewellery, is well placed to exploit the growing demand for exclusive marques across Asia. Greater China is already its biggest market and it is only just getting started in India.
Fashion retailer Inditex (MC: ITX) benefits from a strong supply chain that allows it consistently to innovate within its stores, building excitement and thus generating traffic. Through Zara and its other brands, it is expanding rapidly in Asia and enjoying great returns as a result.