Three Common Pitfalls for Targeting Emerging Market Consumers

Global Head of Research

Over recent years, allocations to emerging markets were rare. Yet many investors would agree that the growth of the emerging market consumer class, with its huge population advantage over the developed world, could be one of the single most important factors for global economic growth going forward. We recently read an interesting thought piece on the Future for Asia, which compiled 100 statistics on Asia. We pulled out five that we thought were particularly interesting but would recommend the full piece1:
1. “By 2030 two thirds of the world’s middle class will be in Asia… by 2035 India and China alone will account for 70% of global electricity demand… and by 2050 Asia’s population will be 5.3 billion, requiring a 70% increase in food production.”
2. “Asian millionaires control the most wealth in the world at $17.4 trillion; North American millionaires, in comparison, have $16.6 trillion.”
3. “In Asia, the number of mobile smartphones is projected to more than double from 1.3 billion in 2014 to 3 billion in 2020.”
4. “China’s automobile market in 2001 was tiny, with total annual sales of less than a million units. In 2004, General Motors sold 1 car in China for every 10 in the US; by 2009 this ratio reached parity. In 2009, total automobile sales in China were in excess of 10 million units.” In 2015, total automobile sales in China were 24.6 million compared to 17.5 million in the US.”
5. “The Alibaba Group generated $14.3 billion in gross sales on Singles’ day, a major shopping event on November 11th; revenue was seven times the $2.59 billion Cyber Monday generated in the US in 2014.”
  Common Pitfalls of Emerging Market Investments These statistics buttress the notion that 1) the scale of the numbers is very large, and 2) the growth rates, as people go from not having things like electricity or a car to having them, are quite high. But these things alone do not lead to strong investment returns, in our view.   Pitfall 1: Excitement Leads to Expensive Markets It is fun to be excited and to be in awe of some of these statistics, but “awe” tends to be a negative for investments. Things like “awe” and “excitement” push up valuations, making it hard to generate compelling future returns.   Pitfall 2: Many Large Emerging Market Companies Have Little to Do with Emerging Market Consumers Some of the largest companies in emerging markets are banks and companies in the Energy and Materials sectors. In many cases, they are owned by governments, and they typically tend to react to global macroeconomic conditions rather than changes in the actual emerging market consumers.   Pitfall 3: Thematic Investments Can Be Very Narrow In focusing on consumption, the first, natural stop is in the Consumer Staples and Consumer Discretionary sectors. But what about smaller private-sector banks? Health care firms? Technology firms? The interests and needs of growing emerging market consumers are likely to be wide-ranging, requiring a similarly wide-ranging focus among investors.   WisdomTree’s Innovation in Emerging Market Consumer Growth The WisdomTree Emerging Markets Consumer Growth Index directly combats these three potential pitfalls at each annual Index screening:   Solution 1: Valuation, specifically the earnings yield, is a component of the selection methodology. Lower earnings yields (in other words, higher price-to-earnings (P/E) ratios) make it harder for stocks to gain inclusion.   Solution 2: Banks greater than $10 billion in market capitalization and Energy and Materials firms are not eligible.   Solution 3: Eight sectors are eligible for inclusion, and 250 constituents are included.   Consumer Growth Performance without the Premium P/E Ratio Consumer Themes • Over the periods shown, the WisdomTree Emerging Markets Consumer Growth Index performed similarly to the Dow Jones Emerging Markets Consumer Titans 30 Index. Both Indexes also outperformed the MSCI Emerging Markets Index over the YTD and 1-year periods. • What we find more remarkable, however, is that the WisdomTree Index delivered this performance and retained a P/E ratio very similar to broader emerging markets. The Dow Jones index, on the other hand, had a P/E ratio almost twice that of broader emerging markets. Remember, a high valuation today makes for a higher hurdle for future returns.   As investors become more open to emerging market allocations, we think the future of the global economy is undoubtedly powered by the emerging market consumer, and WisdomTree has developed a solution to address the common pitfalls of accessing this emerging market consumer theme.         1Source:“Future of Asia by the Numbers: 100 Facts,” compiled by Gurcharan Gill & Emily Kim, 8/16.

Important Risks Related to this Article

Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments.

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About the Contributor
Global Head of Research

Christopher Gannatti began at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. In January of 2014, he was promoted to Associate Director of Research where he was responsible to lead different groups of analysts and strategists within the broader Research team at WisdomTree. In February of 2018, Christopher was promoted to Head of Research, Europe, where he was based out of WisdomTree’s London office and was responsible for the full WisdomTree research effort within the European market, as well as supporting the UCITs platform globally. In November 2021, Christopher was promoted to Global Head of Research, now responsible for numerous communications on investment strategy globally, particularly in the thematic equity space. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant. He received his MBA in Quantitative Finance, Accounting, and Economics from NYU’s Stern School of Business in 2010, and he received his bachelor’s degree from Colgate University in Economics in 2006. Christopher is a holder of the Chartered Financial Analyst Designation.