Can We Extrapolate the US Experience to Emerging Markets?

In our first report of this two-part series, we had argued that the future trajectory of world consumption will be strongly influenced by the rising middle-classes of emerging markets, particularly those in Asia. The question is: can we extrapolate future trends in emerging markets from the evolution of the consumption basket in the United States over the last century? This is trickier than appears at first glance.

First of all, we found that the data is not always comparable across countries due to differences in definition, categorization, the quality of data and so on. This should not be surprising given that we found such large differences in estimates for even a well documented country like the United States. Second, the experience of the US and other developed countries reflects social, cultural and technological contexts that are very different from those prevailing today and in the future in developing countries. For instance, India skipped the fixed line telephone stage and jumped directly to mobile telephones. Over 41% of Indian households had a mobile phone in 2011 (an underestimate in my view) compared to 17.4% who had a fixed line phone. It is obvious that India did not follow the developed country experience in this case. In other words, one should be very careful when making universal generalizations about the trajectory of consumer behavior.

David Fuller's view Companies that are leveraged to the rising middle-classes have been among the top stock market success stories in recent years. They tend to be multinational and Fullermoney calls these companies Autonomies, because they have outgrown their home countries; they source materials and labour where they get the best terms and service, and sell into the world's strongest consumer markets. The best Autonomies have internationally renowned brands which retain their appeal in an ever changing and competitive market place.

The biggest and most rapidly evolving boom is in consumer electronics. Consequently it is also the most competitive. Currently, the dominant player is mighty Apple but Google, Samsung, and Amazon are snapping at its heels, while success stories of the last decade such as Nokia and Research In Motion have fallen by the wayside. It is hard to see how these latter two companies can ever catch up.

Of the four leaders above, Google has finally joined the party in terms of performance. In a benign market environment such as we have today, albeit punctuated by periodic volatility, the main risk for these leaders is overextension relative to the 200-day MAs as this is eventually followed by mean reversion. For in-form Apple, a close beneath $650 would now be required to suggest more downward rather than mostly lateral mean reversion such as we last saw between April and July.