Unlocking global value

GLOBAL INVESTOR 2.07 Lead — 13
the expense of US firms. Opportunities are now open for the “next
generation” of EM mirror companies and national champions. We
believe investing in the right ones could deliver significant returns
on a long-term horizon. A look at Figure 1 shows the profitability of
investment in past national champions. Of course, investors should
not expect to see a straight line: the return on these investments on
a 10-to-15-year horizon would reach close to +13% per annum, more
than twice the geometric mean of world equity markets since 1900
(estimated at +5.7% p.a. according to Dimson, Marsh and Staunton).
However, volatility in most cases would be significant. Corrections in
world equity markets tend to be more pronounced for EMs, as highlighted
by the May 2006 or March 2007 corrections. However, in the
long run, there may be superior returns, as highlighted by Figure 1
showing the performance of some national champions of the past
during selected decades.
The secular rise of the emerging market consumer
EM consumers have grown in importance and are able to fuel local
companies geared to consumption. As highlighted by Figure 2, global
economic growth has accelerated in the past decades, and is increasingly
supported by EM growth. As a result, EMs now represent just
under 50% of world GDP (see Figure 3) in terms of purchasing power
parity (PPP). According to the IMF, in recent years, consumption in
EMs has grown by an average +7% per annum, compared to +2% to
+3% in Western countries. Per capita income growth in the emerging
markets is very high compared to the “Group of 5” (G5) countries,
and such a rapid pace of growth is likely to continue into the
foreseeable future (see Figure 4 and Table 3). Moreover, widening income
distribution in these regions suggests that the higher-income
population will likely grow at an even faster rate (according to
Credit Suisse research, the number of households in China earning
over USD 5,000 is likely to grow more than six times faster than the
growth rate of average incomes).
Moreover, in the past decade or so, several countries have recorded
a significant rise in their GDP per capita, and some cities (like
Shanghai) are already seeing their population benefit from a GDP
per capita above USD 7,000, which is the benchmark for luxury
goods consumption. The level of wealth in these cities matches the
level of GDP per capita in countries like Greece or Portugal, but
with a much larger population base. Urbanization particularly supports
consumption, as new urban residents in many countries discover
national or international brands which have not yet reached
the countryside. The younger urban population is also changing
savings habits of the older generation: in China for instance, many
urban youngsters are known as “yueguangjue,” or “broke every
month,” as they venture on a consumption spree regularly. We are
far from the 40% savings rates of the Chinese population in the year
2000. Still, the EM consumer market is underdeveloped, considering
the proportion of domestic consumer stocks in total EM market
capitalization, let alone compared to the size of the consumer sector
in Western stock exchanges. EM consumerism is in its infancy, but
its growth potential may present some interesting long-term investment
opportunities, as highlighted by Figure 4 and Table 3.
Figure 1
Return in months from USD 100 invested at start
Companies becoming national champions have historically delivered strong
returns during the first 10 to 15 years of growth.
Source: Bloomberg, National Bureau of Economic Research, Credit Suisse
Return
1000
900
800
700
600
500
400
300
200
100
0
Months1
21 41 61 81 101 121 141 161
Figure 3
US technology in 1990
Toyota in 1984
Acer in 1996 US industrials in 1945
British steel and copper in 1887
Share of world GDP
The world is becoming more geographically diversified, with less
dependency on the USA, Europe and Japan. Soon emerging economies will
be as important as the developed ones. Source: International Monetary Fund
%
70
60
50
40
30
20
10
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 E
Emerging
Developed
Opportunities for exposure to this rising EM middle class
We believe that some local companies are benefiting from this
rapid accumulation of wealth. Many consumption-geared EM companies
have not needed to reinvent their business models; they
simply “mirror” the models used by their Western peers in recent