Big Numbers Obscure Emerging Market Trends

Big is not necessarily beautiful when it comes to forecasting emerging markets. In fact, the kind of big numbers that are often bandied around can actually make it harder for investors to understand what’s really going on. We think there is a better way.

Forecasts for consumer spending illustrate the problem. Everyone is in accord that the consumer is going to be a big growth driver in emerging markets. But nobody seems to be able to agree about the figures. According to BCG, the consultants, China and India will consume US$10 trillion of goods and services by 2020, whereas UBS puts the same value on China alone. These disparate forecasts don’t do much to help the investor identify the winners and losers.

Why Are Forecasts Often Flawed?

Part of the problem is the way that forecasters get to such big numbers. Often, they will take current gross domestic product, apply a notional growth rate and assume that personal consumption rises in line. Reality is, of course, never quite that neat and tidy. 

In fact, the early stages of successful developing economies are typically dominated by exports. In this phase, the domestic consumer is relatively unimportant. But as the economy starts to become more sophisticated and wealth trickles down, the domestic market takes on increasing significance. Indeed, the consumers’ share typically grows faster than the economy as a whole, which is why most estimates substantially underrate the value of the consumer.

BRICs Consumer Markets Vary Wildly

There is a whole range of other oversimplification problems that affect investors. For example, there’s a mistaken tendency to assume that all countries offer similar opportunities. Take the BRIC economies (Brazil, Russia, India and China). Although the BRICs have appeared the most dynamic large emerging-market economies, their consumer markets vary wildly. At one extreme, India offers the least developed market, with a prevalence of basic products and highly inefficient supply chains. At the other end of the scale, Brazil’s market is so well developed it is increasingly taking on the characteristics of its developed counterparts, with their accompanying consumer debt problems.

Translating these trends into investment decisions is no easy task, especially since investors are often tied to an index. The problem is that traditional indices give the biggest weightings to firms that have already succeeded, not necessarily to those which are likely to do well in the future.

Largest Companies Face Structural Challenges

Another factor is “bottom-up” stock analysis. By far the easiest companies for analysts to talk to are the big established ones. Because of the fast-evolving nature of their markets, they often face significant structural challenges, but are unlikely to volunteer information about these trends.

A typical example is Hengan, China’s largest maker of nappies (diapers). The company is well researched by analysts and held in many emerging-markets portfolios. Yet our “grassroots” research revealed that it also faced a little-understood but increasingly important issue – rising competition as its customers become wealthier and more sophisticated.

In nappies—as in many other things—even quite poor people aspire to upmarket, brand-name products. As a result, Hengan’s low-end nappies are finding it increasingly hard to compete with overseas brands like MamyPoko (from Japan’s Unicharm), Pampers (Procter & Gamble) and Huggies (Kimberly-Clark), whose manufacturers are not represented in the emerging-markets indices and are therefore off the radar for many emerging-markets investors.

The simple truth is that there is often no simple truth. So investors need to do their homework—and avoid the distractions of “big is beautiful”—to survive and thrive in emerging markets.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Tassos Stassopoulos

Portfolio Manager—Emerging Consumer, Global Growth and Thematic
Tassos Stassopoulos is a Portfolio Manager for AB’s Emerging Consumer, Global Growth and Thematic strategies. He joined the firm in 2007 as a research analyst covering European consumer stocks, and has served as portfolio manager for the International Healthcare portfolio and as consumer sector head on the Global and International Research Growth teams. Prior to joining the firm, Stassopoulos was a managing director at Credit Suisse, where he spent seven years, six of them as a senior analyst and sector head for pan-European travel and leisure coverage. While there, he was twice ranked #1 in the Institutional Investor survey of analysts in his sector. In his last year at Credit Suisse, Stassopoulos was a portfolio manager at the firm’s internal hedge fund, Modal Capital. He also spent eight years as a management consultant at Arthur Andersen, where he specialized in lodging and gaming. Stassopoulos holds an MA in economics from Cambridge University, St. John’s College, and is a member of the Institute of Chartered Accountants. Location: London

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