Get in on the consumption boom

The investment landscape over the next decade is likely to be shaped by global consumerism as the emerging middle class continues to grow. Led by China and India, it is estimated that by 2025 annual consumption in emerging markets will increase by $18tr and account for nearly half of the world’s total consumption.

This has been described by McKinsey as “the biggest growth opportunity in the history of capitalism”. Multinational consumer-facing companies listed on First World exchanges are likely to be major beneficiaries of this consumption boom.

This is why Marriott believes that one of the lowest risk and possibly best returning investments for the next decade will be those businesses that produce everyday basic necessities that consumers can’t go without.

The emerging middle class is expected to more than double by 2030. Thus, in approximately 15 years’ time there will be an additional 3bn people buying more goods and services.

First World consumer-facing multinationals are ideally positioned to take advantage of this development as they:

1) Sell products and services that consumers can’t go without;

2) Have strong footholds in emerging markets;

3) Have trusted brands; and

4) Enjoy pricing power.

The table highlights how Coca-Cola and Colgate-Palmolive, two companies that have consistently increased their dividends annually over the last 50 years, are well positioned for this opportunity.  

These companies are also attractively priced relative to bonds and cash in First World markets. Very low interest rates mean investors can currently receive more income from equities than government bonds and money in the bank.

This is a very rare occurrence as equities, unlike bonds, also provide investors with income growth, which ultimately translates into capital growth.

A starting yield of above 3%, combined with an outlook for dividend growth of 6% p.a., gives investors an attractive annual return outlook of approximately 9% in First World-currency terms.  

The chart above compares the dividend yields of Nestlé, Coca-Cola and Johnson & Johnson to the yields of the US 10-year government bond and US cash. 

In conclusion, investors will be well-served by positioning themselves for a growing middle class in the years ahead.

Marriott believes that multinational consumer-facing companies are likely to be major beneficiaries of what McKinsey has described as “the biggest growth opportunity in the history of capitalism”.

*Lourens Coetzee is an investment professional at Marriott.

This article originally appeared in the 19 May 2016 edition of finweek. Buy and download the magazine here.