The rising middle class of China is creating an equally strong surge in global consumer goods

The ballooning middle class

February 26, 2018 • EMERGING MARKETS

  • Every second, five people enter the middle class globally; 90% of which are located in the Asia Pacific region.[2]
  • This transformation calls for change in the way we view emerging markets as a tech savvy region, employing the middle class and improving the lifestyle of its citizens.
  • ‘Singles Day’ in China recorded larger e-commerce related retail transactions than ‘Black Friday’ in the U.S.[3]
  • Retailers are finding new mediums to promote their products and services, including China’s gaming base of over 580 million people, through mobile ads.

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Emerging markets are growing at twice the rate of developed markets and the primary stock market index representing the region outperformed many of its global counterparts in 2017, returning almost 28% for the year[1]. Past eras may attribute this success to a surge in materials and energy, but a new set of opportunities are arising thanks in large part to the burgeoning middle class in China.

Emerging markets are no longer just a natural derivative on commodities, but rather a secular growth story offering broad-based investment opportunities, with some of the world’s most attractive up and coming tech companies.

Perhaps most staggering is the rate at which this transformation is occurring. While it took ten years for the last one billion people to join the middle class, it is estimated that the next billion will be added in only six years[2]. In fact, five people are now said to be entering the global middle class every second, leading us closer to a tipping point where the majority of the world’s population is identified as being middle class.    

Not surprisingly, 90% of these new middle class entrants can be found in Asia Pacific countries and, in particular, China, whose middle class ranks have exploded in recent years. This is largely attributed to the country’s solid economic growth and concerted efforts to create a more balanced economy benefiting a greater share of its 1.4 billion inhabitants. China’s wage growth, for example, has climbed at double-digit rates between 2009 and 2016, and its labour income share exceeds the Organization of Economic Co-Operation and Development’s (OECD) average[3].

It’s not just an increase in wealth, however, that is driving economic change in the emerging markets. Demographics are also playing a part. The ballooning middle class in China and other Asia Pacific nations is now made up largely of young, tech-savvy consumers who are more interested in online entertainment, shopping, social media and gaming than past generations. Take Singles Day, for example. The newly created holiday encouraging singles to exchange gifts pushed e-commerce related retail transactions to US$25.3 billion in 2017, as compared to only US$19.6 billion on Black Friday spending in the U.S.[3].

Many of these purchases were made through mobile phones, which now act as handheld marketing devices through social media applications and gaming. As a result, more and more retailers are eschewing traditional television advertisements in favour of e-advertising as a way to promote their products and services.

This growing interaction with technology in everyday life is at the heart of China’s homegrown online ecosystem that has given rise to some of the world’s biggest and most profitable internet companies such as Alibaba Group Holding Limited and Tencent Holdings Limited.

Recent estimates suggest sales for Chinese internet companies will grow over 30% in 2018, this on top of 40% growth realized in 2017[4]. While this pace is unlikely to be sustained over the long-term, opportunities are not necessarily overdone.

China’s online social ad mix was just 11% in 2017, compared to 25% in the United States. Meanwhile, China’s internet user level, at 774 million in 2017, is twice that of the U.S. but its online advertising market was just US$50 billion in 2017, or 60% of what is being spent in the U.S.[4].

We see this shortfall as a potential catalyst for the Chinese online advertising market, especially towards social ads. According to eMarketer, online advertising will grow 25% annualized in 2018, over and above 27% growth in 2017.

The online gaming segment also poses an opportunity. China’s gaming base boasts over 583 million people, equal to a 70% penetration ratio[2]. China’s total game market revenue is expected to reach Rmb 197 billion in 2017, with reacceleration of 24% in 2018.

China, and emerging markets as a whole, are a different opportunity set, in fact a leader in technology. As the Asian Pacific middle class continues to grow, we expect these opportunities will only balloon higher.

[1] Bloomberg, as of December 31, 2017, represented by the MSCI Emerging Markets Index.

[2] HSCB, October 2017.

[3] Citi, January 2018.

[4] Morgan Stanley, January 2018.

Commentaries contained herein are provided as a general source of information based on information available as of February 26, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.

References to specific securities are presented for illustrative purposes only and should not be considered as investment advice or recommendations. The specific securities identified and described herein should not be considered as an indication of how the portfolio of any investment vehicle was or will be invested, and it should not be assumed that investments in the securities identified were or will be profitable. 

Published date: February 26, 2018