How can UK investors benefit from positive demographic tailwinds in emerging markets?
Olive Whitmore was 18 in 1742 when she married Arthur Guinness, the founder of the eponymous brewery and a man twice her age. Over the next 24 years she fell pregnant 21 times, although only 10 children survived to adulthood.
The reduction in fertility rates driven by advances in healthcare, education and employment opportunities for women is clearly a good thing. However, the speed of the reduction is happening faster than you might think. In the UK, the fertility rate has not been sufficient to sustain the population level since 1972i. In Japan, low birth rates and the resulting ageing population have led adult nappies to out-sell the baby varieties since 2011ii. In the developing world, China’s population is expected to peak by 2024iii.
The future will not look like the past
If you are fifty, the world’s population will have doubled during your lifetime. There were less than four billion in the early 1970s and around eight billion nowiv. Population growth is generally seen as good for economies. More consumers mean more spending. A larger labour force can result in greater economic output. Both mean more tax revenue and more investment.
But the next fifty years will look very different. Diminishing fertility rates mean that the global population is likely to peak before it reaches 10 billionv. In many countries that peak is coming very soon. The previous doubling of willing workers and consumers has been good for markets. The slowing of that growth and the approaching point of peak people is likely to be less positive.
If we look for consumers in countries with fertility rates that don’t imply population decline, we find that 98% live in either Africa, Asia or South Americavi. By 2050, these regions will constitute 88% of the global population. The conundrum for cautious UK investors is that these positive demographic tailwinds come with elevated risks posed by investments in Indian, Nigerian or Columbian equities. If only it were possible to access these positive demographics by investing in well-established companies that trade on an exchange with stringent listing rules aimed at protecting investors…
By 2050, 25% of the world’s population will live in Africa.
Africa is the stand-out region in terms of population growth. It is expected to double by 2050 with the population of Nigeria overtaking China by the end of this century. Nigeria, in line with the rest of the African continent, is experiencing rapid urbanisation. An astonishing 1 billion African’s are expected to move to cities in the next thirty yearsvii.
UK listed Diageo generates 20% of its sales from Africaviii. It owns the East African Brewing Company, with operations in Kenya, Tanzania, Uganda and South Sudan, as well as Guinness Nigeria. Africa is the fastest growing beer region in the world, and Diageo maintains a number 1 or 2 share in most of its African marketsix .
India’s Urban Population is expected to double by 2050
India is now the world’s most populous country. Its urban population will double by 2050x. Unlike Europe or the US, it boasts a growing population of working people living in smaller family units and spending more money on consumer goods. Diageo’s United Spirits business and Unilever’s Hindustan Unilever are leaders in premium branded goods sold in the country. Unilever is the market leader in clothes washing powder, hair products, dishwashing, tea, skincare, ketchup, soup and health food drinksxi. Diageo’s United Spirits is the leader in the Indian spirits market, controlling around 1/3 of volumes and poised to benefit from more affluent consumers buying more premium whiskeysxii.
Latin America positioned for faster growth?
There is also room for optimism in selective Latin American markets. As well as a faster growing and more affluent population, the region boasts significant commodity resources needed for the global energy transition, and is seeing a boost from “near-shoring” as US supply chains shift away from Asia.
Experian’s Brazilian business is seeing growth accelerate as more affluent consumers access credit, often for the first time. Experian is the largest player in a market where most people don’t yet have a credit card and around 30% don’t have a bank accountxiii. These figures are changing and Brazil’s financial industry is deregulating and expanding at more than double the rate of the US or UK. Experian’s Brazilian business grew by around 20% over the last 12 monthsxiv.
Inchcape is another UK listed business with significant Latin American exposure operating as the official distributor for brands such as Mercedes, BMW and Jaguar in markets such as Columbia, Peru, Chile and Uruguay. The attraction here is the growing car ownership in the region, especially compared to Western markets, where penetration has plateaued. Inchcape is the clear market leader and continues to expand in the region.
Meaningful but manageable
The four companies mentioned have meaningful exposure to strong demographic trends but are balanced by less volatile developed market exposures. For Diageo, Africa and India constitute only 13% of sales, for Unilever, India represents 7%xv. Revenues from Experian’s Brazilian business made up 19% of the total groupxvi, whilst Inchcape’s Latin American exposure is a third of group salesxvii. We estimate that our portfolio averages around 16% direct exposure to developing market demandxviii. We expect it to have a disproportionately positive impact on the capital growth we deliver for clients.
We shouldn’t always expect a smooth ride for companies selling their products in fast developing economies. The old joke among investors was that emerging markets are ones that never emerge. However, we do expect more affluent consumers in Africa, Asia and Latin America to spend more on globally recognised aspirational brands. UK Plc plays a big role in that, be it through sales of dishwasher tablets in India, German car ownership in Peru, or increased Brazilian credit card penetration. These growth opportunities for UK listed companies are thus opportunities for UK equity investors. If born today, Olive Whitmore might be surprised to find out that Ireland is no longer the second largest consumer of Guinness after the UK. That accolade now goes to Nigeriaxix.
i Office for National Statistics: https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/livebirths/bulletins/birthsummarytablesenglandandwales/2021#live-births-and-fertility-rates
iii Fertility, mortality, migration, and population scenarios for 195 countries and territories from 2017 to 2100, Vollset et al., The Lancet.com Vol 396 October 17, 2020
iv UN Dept of Economic and Social Affairs, https://population.un.org/wpp/
v UN Dept of Economic and Social Affairs, https://population.un.org/wpp/
vi UN Dept of Economic and Social Affairs, https://population.un.org/wpp/
vii Africa's Urbanisation Dynamics 2020; Africapolis, Mapping a New Urban Geography” OECD, 2020
viii FY 2022, Source: Bloomberg
ix Diageo Investor Conference: https://www.diageo.com/en/investors/results-reports-and-presentations
x UN Dept of Economic and Social Affairs, https://population.un.org/wpp/
xi Hindustan Unilever Capital Markets Day 2022, https://www.hul.co.in/investor-relations/company-presentations/
xii Diageo Investor Conference: https://www.diageo.com/en/investors/results-reports-and-presentations
xiii Experian at Barclay’s Global Credit Forum September 2022
xiv Source: Bloomberg
xv Source: Bloomberg
xvi Source: Bloomberg
xvii Company data, JOHCM Estimates
xviii Company data, JOHCM Estimates
Professional investors only. This is a marketing communication. Please refer to the fund prospectus and to the KIID / KID before making any final investment decisions. The investment promoted concerns the acquisition of shares in a fund or the investment strategy and not the underlying assets. Past performance is no guarantee of future performance. The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. The information contained herein including any expression of opinion is for information purposes only and is given on the understanding that it is not a recommendation. The information in this article does not constitute, or form part of, any offer to sell or issue, or any solicitation of an offer to purchase or subscribe for any funds or strategies described in this article; nor shall this article, or any part of it, or the fact of its distribution form the basis of, or be relied on, in connection with any contract.
Source: JOHCM (unless otherwise stated.)
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