EquitiesOct 29 2012

Chinese growth driving global technology demand

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The current shift in growth from developed markets to emerging markets such as China, India and Indonesia in terms of both GDP and population is helping to drive consumption of products, particularly those related to technology markets.

By 2050, the Organisation for Economic Co-operation and Development predicts its member’s share of the global economy will decline from 54 per cent in 2010 to less than 32 per cent, while the share of Brazil, Russia, India, Indonesia, China and South Africa (Briics) is projected to grow to more than 40 per cent.

With this growth in GDP comes the growing prosperity and emergence of middle class and high net worth individuals who desire the luxury goods and gadgets commonplace in developed markets.

Philip Poole, global head of macro and investment strategy at HSBC Global Asset Management, says: “There’s no doubt that China in absolute terms has been a big part of marginal consumption growth globally.

“We’re talking about a middle class now of probably 300m people; it’s already probably the largest consumer market in that sense and it’s expected to become the largest consumer market, bigger than the US by 2020 in dollar terms.”

How to spend it

In addition he points out there are now more than a million dollar millionaires in China, ranking it third behind the US and Japan. So consumption has both a middle class and a high-end luxury goods driver.

Mr Poole explains: “Clearly a lot of things that they want to buy have a technological input to them, but not all of them. Luxury goods brands include watches, handbags, cars, so technology is attached to those things but they’re not the kind of things people normally talk about when talking about technology.

“But where there will be a lot more demand for the obvious consumer goods that people buy in the west. Tablets, for example have taken off - and smartphones.”

This is supported by figures from the International Data Corporation’s (IDC) Worldwide Quarterly Mobile Phone Tracker in August, which suggests China will become the largest market for smartphones this year, accounting for 26.5 per cent of all smartphone shipments in 2012, compared to 17.8 per cent for the US.

Gordon Happell, portfolio manager on the Henderson Global Technology fund, adds: “The rise of the middle classes in emerging markets is undoubtedly helping to provide a robust demand environment for many technology companies, particularly those with strong product offerings in the smartphone and tablet markets that are attracting lots of consumer interest.

“We consider both Samsung Electronics and Apple to be clear benefactors of this trend; both companies have seen particularly strong demand for their respective high end products the Galaxy S3 and iPhone 5 in recent months.

“It appears we are seeing a rapid change in consumer preferences across the world when it comes to consumer electronics, with more mature categories such as LCD TV and notebooks experiencing much more challenging conditions against newer more fashionable devices.”

Technology trends

Walter Price, senior portfolio manager at RCM Technology Trust, notes a clear trend in technology in emerging markets is the growth of e-commerce and internet development.

“I think what we’ve seen is that China is kind of skipping the mall build-out phase we went through in a lot of developed markets, and is going right to e-commerce from the neighbourhood stores.

“That’s not to say that there aren’t some destination malls being built in some second and third tier cities, but instead people are going onto the web to look for luxury goods and attractive products that they see on TV or they see on the web or western shows, and they’re buying them on the internet and having them delivered.”

He adds: “You have also got internet video that’s growing really fast in China as an alternative to the state media, and you’ve got e-commerce which is growing really fast and has one of the highest growth rates in any of the countries around the world and that causes rapid growth for new technology products.”

Mr Price notes one of the big issues for the PC industry has been the rise of the tablet computer in China, particularly as tablets suitable for surfing the web and watching internet video are priced at roughly $100 in southern China.

“As a result, because the price point is so much lower than a PC in China, you’re seeing people buying those instead of PCs, and so the whole worldwide PC industry has gone into this slow growth or no growth phase, simply because of what’s going on in emerging markets. I think we’re seeing many interesting phenomena like that.”

However he warns that while the growth of the internet and the desire of the Chinese to try and differentiate themselves can see technology brands grow rapidly, it can also go the other way.

“If they see a new phone from say Samsung they may buy less of the iPhone, as they see people carrying the Samsung Note – the product that fits in people’s handbags – so the acceleration and deceleration of these luxury products are very strong.”

Dmitry Solomakhin portfolio manager of the Fidelity Global Technology fund, adds that for some consumer technology products emerging markets already represents a significant proportion of global demand, with China currently the second largest market for LCD TV sales.

The manager explains: “Overall, emerging markets as a whole represent a long runway of growth because they are still very under-penetrated in terms of technology, both in consumer as well as enterprise IT investments.

“At present, in the consumer technology categories, demand seems to be bifurcated between a relatively small proportion of aspirational buyers who are happy to pay a premium for their favourite brands - not dissimilar to the luxury goods market - and a significant proportion of value buyers going for lower cost options.

“As more of this value buyers move into the middle class category, their average spend on technology products will increase further.”