SINGAPORE (Dec 13): Last week, we wrote about our investment thesis for Alibaba Group Holding, China’s leading e-commerce player, and why we like the stock for its long-term potential that is underpinned by rising consumerism in the country.
Thanks to economic reforms and a shift to a more market-based economy since the late 1970s, China has enjoyed strong sustained growth. It became the factory for the world on the back of cheap and abundant labour. This resulted in a rapid rise in per-capita incomes, which lifted hundreds of millions from extreme poverty into middle-income class within a relatively short period of time.
After decades in which economic development was driven primarily by investments and exports, China is now an economy in transition. As its people grew richer, consumption boomed. It is today the world’s fastest-growing consumer market.
Household consumption in China rose from 35% of GDP in 2010 to around 40% currently — and should continue to increase. For comparison, consumption makes up more than two-thirds of GDP in the US.
The middle class has a high propensity to spend and the income to spend on discretionary goods and services. It is estimated that two-thirds of global private consumption comes from the middle class, even though they make up only half of the world’s population. The middle class has expanded dramatically in the last two decades, thanks to sustained rapid economic development in China. Official statistics estimate that China’s middle class numbers more than 400 million of its 1.4 billion population currently, up from just 3% of the population in 2000. This number will continue to expand.
China and India are currently the world’s two most populous countries, with the population totalling some 1.43 billion and 1.37 billion respectively. They dwarf the 329 million in the US, the third most populated country.
The next seven highest populated countries are Indonesia (270 million), Pakistan (217 million), Brazil (211 million), Nigeria (201 million), Bangladesh (163 million), Russia (146 million) and Mexico (128 million), according to data from the United Nations Population Division.
There is no one standard global definition for “middle class”, and figures vary from study to study, but we believe the trend is the same. For all the above-mentioned countries, save for the US, Russia and Brazil, the majority of their populations are categorised as low-income and poor. A study done by Pew Research Center puts India’s middle class at barely 4% of its population, whereas Indonesia’s middle class is estimated at 14%.
Meanwhile, many developing Asian and African countries — such as Cambodia, Vietnam, Laos, Bangladesh, Myanmar, the Philippines, Indonesia, Ethiopia, Uzbekistan and Ghana — have grown their GDP at a consistently higher clip than advanced economies over the past 10 years. So, per capita incomes are rising quickly.
Population growth in developing countries is also expected to far outpace that in the developed world.
Mathematically, therefore, the number of the world’s middle class — a function of population and disposable income — must grow, and grow rapidly.
To illustrate this point, we have borrowed some statistics from a study done by the Brookings Institution in 2017 (“The Unprecedented Expansion of the Global Middle Class, An Update”) (see chart). In this study, “middle class” is defined as daily per capita incomes of between US$11 and US$110, based on 2011 purchasing power parities from a World Bank survey.
One of the biggest worries today is the downtrend in gross capital formation, which will eventually constrain future production and result in a fall in consumption and/or inflation. That will, in turn, hurt corporate profits, jobs creation and wage growth. We wrote about this very subject not too long ago.
The sharp declines in capital investments in Europe and Japan — despite negative interest rates — are probably due to limited opportunities, given the sluggish consumption. The size of the middle class is large but stagnating; population growth is low to negative and ageing.
In the US, where consumption is still robust, we believe slower investments are due to reduced capital intensity — improving efficiency and productivity brought about by rapid adoption of technological advancements and digitalisation. But over time, it too could mirror the slow decline currently unfolding in Japan.
Looking at these facts, one would conclude that the long-term outlook for the global economy is not good. In reality, we may be looking at the wrong places.
The rise of the middle class in the US, Europe and Japan — since the end of World War II and especially in the 1960s and 1970s — has been the major source of demand and the engine of growth for the global economy.
As consumption growth in developed nations starts to slow, the future source of the world’s demand will shift to emerging economies in Asia and, further ahead, Africa. It will be driven by the sheer number of newly minted middle class and it is inevitable. There are currently an estimated 3.8 billion people in the world considered middle class. This figure is forecast to surpass 5.4 billion by 2030, about two-thirds of which will hail from Asia-Pacific (see table).
In summary, consumption — particularly discretionary expenses for leisure, transport, lifestyle/personal products and services — must continue to rise as will global economic growth over the long term. This phenomenon will have effects on global capital formation and negative interest rates. We will elaborate more on this in the coming weeks.
The Global Portfolio gained 1.5% for the week ended Dec 12. Alibaba, Builders FirstSource and Alphabet were among the big gainers, whereas ServiceNow and Home Depot declined marginally. Last week’s gains lifted total portfolio returns to 16.2% since inception. The portfolio is outperforming the MSCI World Net Return Index, which is up 13.4% for the same period.
Tong Kooi Ong is chairman of The Edge Media Group, which owns The Edge Singapore
