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Emerging market landscape keeps on changing

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Investing in growing consumer confidence - September 2013

Vast wage inflation has supported a growing middle class, who for the first time, can look beyond essential purchases to engage in consumer spending, with a particular emphasis on western luxury brands.

Meanwhile, their disposable income is also being spent on private healthcare, as the population ages. Across Asia, the minimum wage has been rising by as much as 15 per cent per annum. In seven years, wages for manufacturers in China have risen by roughly 20 per cent a year.

More recently, emerging markets have been hit by slower gross domestic product (GDP) growth, volatility in the commodities sector, political instability and a loss of competitive advantage due to wage inflation.

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Mark Williams, chief Asia economist at Capital economics, notes that an economic slowdown of this type “inevitably causes strains,” but that these are particularly felt more in some areas of the economy than others.

Managers say that consumer-based demand is unwaning, with dominant economy China’s middle class set to grow even bigger, even as its GDP growth is set to be the slowest in 23 years in 2013.

Nicole Vettise is client portfolio manager on the £185.9m JPMorgan Global Consumer Trends fund, which divides its portfolio into three areas: urbanisation, consumption, and health and wellness. “For us, it’s still very much about China,” she says, as while growth is slowing, it is promising that the Chinese government is looking to rebalance growth so it is less reliant on exports and fixed assets and geared towards the domestic consumer.

But the fund has shifted away from luxury brands, which used to make up a third of the portfolio, and now make up about 17 per cent, because Ms Vettise claims valuations have become too expensive in this space.

A high profile crackdown on corruption and excessive consumption has also harmed sales of luxury products, after government officials were criticised for their spending on items such as high-end watches, in a blow to Swiss manufacturers.

Conversely, while 10 years ago, healthcare made up between 5 and 10 per cent of the portfolio, it is now more like 33.3 per cent, with six of its top-10 largest holdings part of this bracket at the end of June.

Mike Kerley runs the £377m Henderson Far East Income trust, and has been managing money in Asia for 20 years. He agrees with Ms Vettise that healthcare is a major play in the region, as while the workforce still tends to choose lower end products, China’s ageing population is an added bonus as is retirement consumers are more likely to buy luxury products including healthcare

Ongoing trends such as healthcare emerge as a way to consistently find returns as the shifting demographic means the end consumer is getting older. While strong western brands have done well in emerging markets in the past, investors should be aware that value is becoming harder to find.