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The great consumer divide

Kira Nickerson
Kira Nickerson

The consumer is often hailed as the saviour of the global economy. After a long recession and as we head into what is being hailed as the age of austerity, just how are consumers holding up and what does this mean for investments?

In the UK, the emergency Budget underscored the belttightening that needs to happen for us all. Following the announcement, the price comparison service uSwitch reported fears of a cutback in consumer spending may spark a double-dip recession.

According to uSwitch, eight in 10 consumers intend to change their behaviour after the Budget and, of these, 27 per cent will cut back on spending. The January 2011 VAT increase will not improve that situation and uSwitch estimates 48 per cent of consumers will rethink big purchases and 50 per cent will cut back on luxuries next year.

F&C director UK strategy Ted Scott says consumers are the biggest part of the UK economy – about 75 per cent of GDP – and the Budget is likely to crimp growth in the next few years. But not all is gloomy for consumers, says Scott, who believes the UK can avoid a double-dip recession.

He says: “The impending fiscal squeeze will emphasise the importance of an easy monetary policy. Interest rates are now likely to remain low for even longer and it is possible that the Bank of England will have to resume quantitative easing if the recovery falters.”

CF Miton special situations and strategic portfolios fund manager Martin Gray agrees with Scott over quantitive easing and predicts that UK authorities will look to loosen monetary policy further.

Gray says: “Inflationary expectations over the next year or so still seem far too high, given the massive shocks delivered to the financial system. Household debt will continue to wear down demand for goods and discretionary services, which in turn is likely to ease prices lower.”

That said, he also expects high unemployment to be protracted in this economic cycle and he points out that the CBI is estimating around half of all UK companies are planning no pay increases in 2010 – all of which will hit consumers hard.

Scott says: “Consumers want to see comprehensible and decisive policy announcements on reducing the deficit. Yet the public, particularly in Greece and Spain, are not reacting well to the severe austerity packages being introduced. It is a fine balancing act for the authorities and it will be difficult to keep both sides happy.”

In examining US equity managers, S&P Fund Services says fund managers are closely monitoring employment levels in the country, with improvements deemed necessary to sustain the level of consumer spending seen so far.

But while the situation with consumers is uncertain in the West, it is a lot rosier in emerging markets.

JPM global consumer trends fund manager Peter Kirkman says: “As emerging markets continue to see an increasing trend towards higher living standards and urbanisation, consumption patterns are changing. Western brands are benefiting greatly from this with already well established business models and distribution channels.”

JP Morgan Asset Management says consumer spending in South Africa has already notably increased this year and is expected to remain buoyant. JP Morgan emerging markets equity team head Richard Titherington says: “The growth in consumer spending and the development of an emerging middle class goes beyond the World Cup, although such events do highlight the international perception of the stability of a country.”

The JPM Africa equity fund currently has 9.05 per cent in consumer discretionary stocks and a further 17.11 per cent in consumer staples.
Premier’s China enterprise fund manager Fen Sung is equally positive on the state of the consumer in his investment region. Direct and indirect holdings in his fund give him a 40 per cent slant towards the domestic consumer in China.

Although around 60 per cent of China’s population is still rural, within the 40 per cent in urban regions, about 5 per cent are what many would classify as mega-rich and there is a huge and growing middle class. Chinese consumers love their designer items, says Sung. Many of these are Western luxury brands at the moment but China is developing its own. LiNing is a make of trainers that sell in China at a similar price to Nike products, he says.

One of the interesting dynamics of China’s consumer story is the impact that the country’s single-child policy has had on spending dynamics. Although it is often cited that Chinese consumers have lower debt and a higher savings rate than in the West, that may not be the case for too much longer.

Sung says there is a generation of consumers not saving as much as the one before as they are quite often given everything they need by family members doting on the one child. Sung says this generation of consumers are known as “little emperors” and are very much about buying.
Although he has substantial weightings to the consumer discretionary and consumer staples sectors, there are other ways Sung is playing on the rise of the Chinese consumer.

One of the bigest positions in Premier China Enterprise is insurer Ping An. Focused on life and health insurance, which has a low penetration in the country, Sung sees this as a huge growth market.

Fidelity China opportunities manager Stephen Ma also pointed out that China’s recent move in mid-June to end its peg to the US dollar is a positive for domestic consumption as it provides potentially cheaper imported goods and resources combined with rising wage levels.

He says: “Chinese companies deriving earnings from Chinese domestic consumption industries and reporting earnings in foreign exchanges are likely to be key beneficiaries, as well as those companies importing goods from outside of China.”

Consumer activity may be a fragile thing in this age of austerity but it seems once again, the case for emerging markets stacks up better than the West.

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