Back in July 2012, BNY Mellon Asset Management analysts Ralph Goldsticker and Robert A Jaeger said in their study “In Pursuit of the Emerging Markets Consumer” that the Consumption theme out of emerging markets was not cheap.
The above study said that sophisticated investors believed emerging markets would see higher growth, more financial strength and “greater exposure to the rising emerging markets consumer.”
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The dominant Emerging Market themes
The analysts chose in the study to look at EMs across their main themes of Commodities, Manufacturing, Consumption and Investment.
Their analysis of ‘Thematic Exposures by Country’ broke out each EM country’s stock market into exposure (in terms of market capitalization) amongst the above four themes. Another section of that analysis compared this with the country’s weightage (again, theme-wise) in the MSCI EM index.
It became clear across these studies that Investment was the dominant theme across these benchmarks whereas Consumption was comparatively “light.” In fact, Consumption was not the dominant theme in any of the EM countries.
The Consumption theme
Given that Consumption was under-weighted, the authors suggested that a Consumption oriented investor could create a portfolio of consumption stocks from countries that had a higher weightage in the MSCI EM index.
But 15 months hence … What is the outlook on the EM Consumption theme?
Here’s a look at the performance of two EM sectors, Consumer Goods and Consumer Services, as computed by Societe Generale Global Quantitative Research analyst Andrew Lapthorne in the recent study ‘Global Equity Arithmetic’ of October 7, 2013.
It appears that earnings growth in the Consumer Goods sector in Emerging Markets is expected to fall from 31% in 2012 to 18.1% in 2013 and to 12.1% in 2014. In contrast, sectoral growth for the World is expected to be 15.1% in 2014.
However, Consumer Services in the Emerging Markets should see improving earnings growth from (-8.4%) to 6.1% in 2013 and 24.4% in 2014 (but World is expected to be only 12.1%).
On the other hand emerging market prices have also fallen substantially YTD as per the same study:
China (Shanghai) A: (-4.2%)
China (CS300): (-4.5%)
Brazil Bovespa: (-13.3%)
Russia (RTS): (-5.5%)
India (S&P CNX 500): (-1.4%)
Mexico (IPC): (-6.4%)
Given the inherent demographic profiles of EM countries that support the Consumption theme, it appears that investors could still find profitable opportunities amongst consumption stocks in these countries.