Middle Class Expansion in the Emerging Markets
Presented by:Rob Lutts, President & CIO
Tim Moore, CFA, Portfolio ManagerDennis Wassung, CFA, Portfolio Manager
CHINA VS. UNITED STATES
Presented by: Robert T. Lutts, President & Chief Investment Officer
United States versus China
TAX POLICY IN USA– U.S. corporate tax
high– City, State and
Federal sales tax, capital gains, social security tax, dividend tax and more
– We are not undertaxed
TAX POLICY IN CHINA– Very immature tax
policy– No real estate taxes– Low corporate taxes– Low income taxes– No social security
tax, only modest obligations
United States versus China
US Debt Burdens
Large and Growing
• US has debt close to 90% of GDP
• Off balance sheet obligations of Social Security and healthcare could be larger than $14 trillion debt
• US attitudes toward debt are excessive
• So, US debt could be 2X GDP
China Government
Finances are Strong
• Total government debt is much less than US – estimates around 40% of GDP
• Average Chinese citizen avoids debt
• Foreign Exchange Reserves are over $3 trillion
• China has flexibility
Incentives for Entrepreneurs are High
• High rewards and much wealth are there for those who take risk in growing capital.
• Government policy encourages capital investment.• Tax policy is favorable for investment.• Infrastructure costs are low in China.• Cost structure still very favorable for all businesses to
move operations to China. Two reasons:1. Lower costs
2. Enlarge potential markets
China and Many Other Emerging Markets Favorable for Capital Growth
• Over past ten years, Emerging Markets outperformed developed markets by 10% per year.
• We anticipate this to continue once money comes back to equity markets.
• China will eventually open up its currency, and this will help China grow – fully convertible currency.
• China continues to take advantage of global opportunities – buying in Brazil, Greece, and other troubled areas.
EARLY INNINGS AND MYTHBUSTERS
Presented by: Tim Moore, CFA, Portfolio Manager
Early Innings of Growth• Young Stages of Urbanization & Localization of
Brands, Services, Products. Vast “Window of Opportunity” ahead.
• Middle Class = 2b people w/ $7 trillion annual spending could reach $20 trillion in 2020 (2x that of US today).
• EM Population living in cities might grow +45% next 20 years.
• GDP growth of EM is 3x that of Developed Markets for 2011 & 2012 expectations (+6% vs 2%).
• Not just an “outsourcing” region anymore. They are developing their own technology and innovating.
Myth versus Reality
Myths• It is a lot of people, but
not much economic growth
• Only speculators or risky people invest there!
• Those countries have so much debt!
• Their stocks do not perform better than Developed countries
• Currency is too volatile
Reality• EM is 55% of world’s GDP
growth and 45% of GDP but only 17% of World Mkt Cap
• EM had record $95b inflow in 2010 for Equities
• EM has the least amount of Debt/GDP of any region
• EM stocks outperformed US (S&P 500) by 12%/year on average over last 10 years
• Broad basket of EM nations reduces Currency Risk
“Catch-Up” Spending to Accommodate the Middle
Class
China is 60% of this $6 trillion expected spending 2010-2013
Broadening Offerings
What Else?• Credit Cycle, Urbanization & Home Purchasing
affects ALL industries. “Halo Effect” lifts growth of Retail, Construction, Energy Needs, Infrastructure, Banking, Healthcare.
• Multinational Companies only average 11% of sales exposure to EM (highest are Nokia, Nike, Suzuki, Hyundai, Boeing, Anheuser-Busch, Philip Morris Intl).
• Much better accounting practices & disclosures today.
• Supportive valuations of stocks along with dividends.
• Strong balance sheets and raising rates to curb inflation.
TRANSITION FROM “MADE IN CHINA” TO “CONSUMED IN CHINA”
Presented by: Dennis Wassung, Jr., CFA, Portfolio Manager
Emerging Markets Middle and Upper Class to Surpass Developed Markets
by 2015
6% of 2000 EM population, growing to 22% in 2020
Emerging Markets Consumption is
Growing on a Global Scale
China and India Consumption Data
Consumption Spending Breakdown
China’s Auto Market Is Now World’s Largest
10-Year Compound Growth of 24% -- 2M to 18M units!
China Healthcare Industry10-Year Compound Growth of
~16%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010$0
$50
$100
$150
$200
$250
$300
$350
4.0%
4.1%
4.2%
4.3%
4.4%
4.5%
4.6%
4.7%
4.8%
4.9%
5.0%
China Healthcare Expenditures (US$, billions)% of GDP (RHS)
No Longer Just “Made in China”
• China is now estimated to be the world’s largest consumer of luxury goods – with 22% share of the 2010 global market @ $13 billion (overtaking Japan)
• China’s Retail Sales of Consumer Goods growing 17% versus GDP growth of about 9.5%
• China’s Automobile Sales topped the U.S. in 2010, becoming world’s largest car market
• World’s largest Internet user population, leading to growing eCommerce industry