The Consumer Is Not Dead

One who is seeking fantastic medium to long term returns in the global financial markets should remember these five words: the consumer is not dead. This can mean a lot of things to a lot of investors as to what sectors or companies are best to allocate capital, but most importantly, this means that despite the current volatility in the Mideast, the continued tapering discussions and talk of an “overvalued” market, the consumer, which accounts for two-thirds of US GDP and trillions of dollars in global spending, will continue to push global growth.

From 2012 to 2014, the rate of change in the annual growth rate in global annual disposable income per household in real terms rose over 250%. Western Europe seems to be on the right track in terms of reducing unemployment and boosting growth, although it is expected to be the region with the lowest rate of growth in real household disposable income in 2014, at 0.3% year-on-year in real terms. This positive, albeit modest, rate of growth will be a much welcomed turnaround for households in the region who saw their real annual disposable income fall every year since 2007.

Looking at emerging markets, the data is even more incredible. In 2010, the emerging markets accounted for $12 trillion in spending. In 2025, they are expected to account for about $30 trillion of spending, or nearly half of global spending. Obviously, the forecasts of consumer spending, income and demographics of this size can vary, but there’s little debate about the direction. According to the McKinsey Global Institute, the ranks of the global consuming class will swell from about 2.4 billion today to 4.2 billion by 2025, when the world’s population is expected to be about 7.9 billion. In other words, for the first time in history more people will belong to the middle class than living in poverty, according to McKinsey.

Latin America and Asia are obvious players to watch. From 1990 to 2007, the number of middle-class households in Latin America has increased from 56 million to 128 million, according to a 2011 analysis by the United Nations Economic Commission for Latin America and the Caribbean. Moreover, research from McKinsey suggests more than 75 percent of China’s urban consumers will have, in purchasing-power-parity terms, the equivalent average income of Brazil and Italy by 2022. Just 4 percent of urban Chinese households were within that level in 2000—but 68 percent were within it in 2012. In the decade ahead, the middle class’ continued expansion will be powered by labor-market and policy initiatives that push wages up, financial reforms that stimulate employment and income growth, and the rising role of private enterprise, which should encourage productivity and help more income accrue to households. Should all this play out as expected, urban-household income will at least double by 2022.

What does this all mean for the investor considering sectors and individual companies?

There isn’t a universal answer to this question, but there are 4 major sectors that are directly affected by consumer incomes and those are the areas that have my attention. Global consumer finance, healthcare (SRCL), consumer non-cyclicals (BUD) and pharmaceuticals will be best positioned over the next decade given these fundamental drivers. In the international pharmaceutical business, developing countries are not called emerging markets. They’re called “pharmerging” markets. Such countries are expected to significantly increase their spending on medicine over the next four years, accounting for about 70% of the projected increase in sales for the leading pharmaceutical companies through 2017.

One of the most important lessons I have learned in the years I have been investing is as follows: given the status quo, a company’s technical history reflects its business model. Look at a company like General Mills (GIS), Colgate-Palmolive (CL) or Church & Dwight (CHD). These companies are in the fast paced consumer non-cyclical space, heavily tied to global household incomes, rising populations and the growth of emerging markets. Despite wars, recessions and bubbles across the globe, the fundamentals for these companies have been intact for the last 40 years and it seems that they will be +20 PE stocks perpetually. These companies’ stock charts are virtually straight lines averaging 12.6%, 13.3% and 36.9% CAGR excluding dividends respectively over the last 10 years, making the recession of 2008-2011 nothing but a blip. If an investor had held just these 3 stocks in their portfolio over the last 35 years, he would’ve beaten the S&P 500 by more than 4000%. What does this mean for the future? I obviously cannot provide an answer to that but needless to say I don’t see a reason why the next 20 years for these companies will be that much different given their business models and industry fundamentals.

Overall, sometimes the most obvious factors provide for the best investment ideas. Continue to look for global mid-cap companies attacking the global consumer for the best long term results.