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China: Consumers Keep Spending

Bloomberg, as of 10/19/13.

 

Highlights

  • Around 300 million Chinese people now live a middle-class lifestyle.
  • Over the past year retail sales climbed 13.3%2 and urban disposable income grew 14.1%.3
  • Companies targeting China's giant consumer market are poised to benefit.

Investors may have come to expect China's economy grow rapidly each year. Indeed, the Chinese economy grew by at least 9% per year between 2002 and 2011, and by 10.4% as recently as 2010. Along the way China became the world's 2nd largest economy with a Gross Domestic Product of nearly $8.3 trillion (by contrast, the U.S. economy is about $15.7 trillion).1

The pace of Chinese expansion has cooled as the government works to reposition its economy away from growth driven by credit, exports and investment, and more toward consumption-led growth—a more sustainable economic path. Though the Chinese economy may no longer be expanding at double-digit annual rates, the largest emerging market will likely offer many avenues of potential opportunity in 2014 and beyond. Among the best of these may be exposure to well-run companies with a focus on the Chinese consumer.

About one- quarter of the Chinese population, or 300 million people, has attained some type of middle-class lifestyle, and that number should continue to rise at a rapid clip for many years. Even as the economy grew by "only" 7%-8% year over year in the third quarter of 2013, retail sales climbed by 13.1%2 and urban disposable income grew at 14.1%.3

Source: Morgan Stanley, as of 2/28/13.

Poised to benefit from the rising Chinese consumer are companies able to cater to their needs, particularly those that aren't overly capital intensive. Examples include firms that stand to capitalize on rapidly expanding Internet adoption, from e-tailers, social media and gaming sites to online advertising firms. Discretionary spending on education, healthcare, luxury goods, and travel and leisure is also likely to rise, to the potential benefit of well-positioned firms in these industries.

Source: World Bank, 11/25/13.

Investors are likely better served owning such companies rather than less efficient, state-owned enterprises (often energy and financial behemoths), many of which dominate the holdings of Chinese and emerging market index funds. This is all the more true now that the commodity super-cycle appears to have died down on lower emerging-market demand for raw materials, and because many Chinese banks appear undercapitalized.

Although valuations are somewhat elevated for consumer-oriented companies headquartered in China and elsewhere in Asia, plenty of attractive investment opportunities remain. And with consumer spending in Asia forecasted to eclipse that of North America by 2020, the pace of demand for consumer goods is likely to be robust for years to come.4

Access our complete 2014 Market Outlook or handy infographic summary for more information.


1. World Bank, 11/30/13.

2. Bloomberg, as of 10/19/13.

3. Morgan Stanley, as of 2/28/13.

4. Wall Street Journal, "In Asia, Consumer Discretionary Sector Outperforms," November 5, 2013.

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