Common Prosperity of the Great Consumer®
By: Malcolm Dorson, Senior Portfolio Manager & Joohee An, Senior Portfolio Manager
Mirae Asset’s Emerging Market Great Consumer® Fund
Mirae Asset launched the Emerging Market Great Consumer® Fund in 2010 with a unique view on the direction for sustainable growth and returns across Emerging Markets (EM). We saw and continue to see EM in a powerful transformation as countries shift away from asset-heavy/low-return industries like commodities, manufacturing, and construction towards innovative, asset-light, profitable business models classified as “New EM.”
This transition has meant that companies have often been shown to generate higher returns and therefore have paid higher salaries, which produces more discretionary income and, essentially, a middle class. This new high-earning group is spending their money in the “New EM” category – discretionary goods & experiences, healthcare, education, travel, luxury, and services – creating a domestic consumer-driven, self-fulfilling driver of growth. At the end of the day, it means EMs return profiles are increasing, their earnings drivers are growing more predictable, and dependence on outside forces like commodity prices, trade rhetoric, and foreign exchange is diminishing.
Changing the Equation
The importance of consumption driven-growth shows through an economic lens as well. A country’s economic success depends on Gross Domestic Product (GDP) expansion, and EM countries understand they need new drivers to maintain growth.
GDP = Private Consumption + Government Spending + Private Investment + Net Exports
Government spending cannot last forever, Exports should diminish as countries do not want to rely on outside forces, and Private Investment is dependent on business cycles. That leaves Private Consumption as the only piece EM governments have left to control, to drive GDP expansion. With roughly 63% of GDP growth coming from private consumption, the US has set a model for a sustainable economy. EM countries have watched, learned, and are beginning to emulate this model. The question is – how do EM governments get there while lifting other factors of the GDP equation at the same time?
Example Case: China and “Common Prosperity”
China’s policy objective of “common prosperity” provides a clear example of this shift to private consumption as the key driver of sustainable growth. China has experienced tremendous economic growth, but it has come with a rise in social inequality and economic disparity. Common Prosperity is a development plan aimed at promoting domestic-oriented quality growth.
The Chinese government understands that it must move its economy up the value chain, create higher-paying jobs, grow its middle-class, and improve growth through consumption. This starts with moving capital allocations away from real estate and low-level manufacturing to higher value-add production.
The Challenge: Real estate, exports, and simple manufacturing represent China’s old growth drivers. Property investment has grown by an average of 18.2% per year since 1997, which is 1.6 times nominal GDP growth in the same period. Homeownership has surged from 47% in the mid-90s to over 80% today, much higher than developed economies like the US, Japan, and South Korea. However, this growth should taper, as we have already seen the government deliberately slow down the property sector. In terms of exports, we see the world moving more towards isolationism and protectionism, meaning China will need to depend less on export-led growth. Last, manufacturing should also diminish, as China can no longer be the cheap source of labor for the rest of the world going forward.
The Opportunity: With old economy sectors providing less ammunition to drive GDP growth, the government has shifted its focus to technology and sustainability. Investment in these areas will help drive growth on their own, but they will also drive higher wages, leading to increased domestic consumption, which creates a virtuous cycle. This cycle should make up for the slowdown in exports, real estate investment, government spending, and low-end manufacturing. With falling birth rates, China sees lower annual new workers enter the labor force. The government understands that a sustainable future requires a shift from quantity to quality. That means moving up the value chain similar to what other countries did through the 20th century. China is only at the same stage of industrial development as Japan in the 1970s and South Korea in the 1980s. Over the next 5 years, 50 million graduates are set to enter the workforce in China, more than the US, Germany, Japan, Korea, and Southeast Asian countries combined. The playbook is there, and China’s increasingly educated workforce is well prepared for this transition.
Leading to a larger middle class: A highly educated population plus a government that is investing in value-add technology equals higher-paying jobs and a growing middle class. Increasing levels of urbanization should also boost the country’s middle class. Urban disposable income is over 2.6 times higher than the rural level. China’s urbanization rate is around 61% compared to over 80% in the US, the UK, South Korea, and over 90% in Japan. With that said, reform to “Hukou” (a registration system that allows registrants to receive various government benefits) represents another driver for middle class consumption, as it will incentivize migrant workers to reestablish themselves in cities. Easing the system could provide almost 300 million migrant workers, nearly the size of the US population, access to social welfare and raise their propensity to consume. Migrant workers without “Hukou” have a savings rate double that of urban workers – so they are spending less. This change should help drive urbanization and consumption going forward.
Producing higher consumption: A fast-growing middle-class translates into consumption playing a larger role in future economic growth. China’s middle class represents roughly 400 million people, almost 30% of its population. Annual income growth of 6.5%, which seems plausible with 5-6% GDP growth, implies that the middle class will represent over 45% of the population by 2035. Policy changes towards lowering inequality should help this trend as well. If China’s GINI Coefficient moves from 0.468 to 0.400, then the middle class should grow to roughly 50% of the population. As China’s middle class expands to 50% of its population, private consumption would contribute 58% of GDP, a big increase from the current 35%. This shift in private consumption changes the GDP equation and creates profitable and sustainable growth going forward – similar to the US.
Conclusion: Common Prosperity of the Great Consumer®
“Common Prosperity” headlines rattled markets in 2021, but as on-the-ground investors, we believe China’s new policy objective represents a clear step towards a sustainable and robust economy. China’s policy shift aligns with our consumption-driven growth thesis. As EM economies pivot from cyclical growth drivers to consumption, new asset-light/high-return business models should continue to emerge and stand out from the pack. EM countries are going through a powerful transformation, and we believe that the companies that benefit from this shift, will show the best investment prospects looking forward.
 HSBC, November 2021.
 HSBC, November 2021
 China’s Educated Population statistics, National Bureau of Statistics of China, May 2021.
 HSBC, October 2020
 The World Bank, World Urbanization Prospects 2020.
GINI Coefficient is a measure of statistical dispersion intended to represent the income inequality or the wealth inequality within a nation or a social group.
Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.
MSCI Emerging Markets (EM) Index captures large and mid cap representation across 24 EM countries in Eastern Europe. With 837 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. You cannot invest directly into an index.
For a list of the top ten holdings of the Emerging Markets Great Consumer Fund as of the most recent quarter-end click here. Holdings are subject to change at any time.
The views and information discussed in this brochure are subject to change and may not reflect the current views of the writer(s). The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of the portfolios or any securities or any sectors mentioned herein. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation.
Past performance is no guarantee of future results.
Investment Considerations — There can be no guarantee that any strategy (risk management or otherwise) will be successful. All investing involves risk, including the potential of loss of principal.
Emerging Markets Risk — The risks of foreign investments are typically greater in less developed countries, which are sometimes referred to as emerging markets. For example, political, legal and economic structures in these country may be changing rapidly, which can cause instability and greater risk of loss. These countries are also more likely to experience higher levels of inflation, deflation or currency devaluation, which could hurt their economies and securities markets. For these and other reasons, investments in emerging markets are often considered speculative. Similarly, investors are also subject to foreign securities risks including, but not limited to, the fact that foreign investments may be subject to different and in some circumstances less stringent regulatory and disclosure standards than U.S. investments.
Market Disruption and Geopolitical Risk — Geopolitical and other events, including war, terrorism, economic uncertainty, trade disputes, natural and environmental disasters, systemic market dislocations, public health crises and related geopolitical events have led, and in the future may lead, to increased market volatility, which may disrupt U.S. and world economies and markets and may have significant adverse direct or indirect effects on the value of a Fund and its investments.