There is so much information being published on China and the emerging economies. 13D Research, published in the US, has some of the most thoughtful and accurate information that we have found and their analysis is always on the money. Last week, they published an excellent piece on the changing world dynamics. They noted that for decades, the global economy has relied very heavily on US and European consumers.

As Homi Kharas, a scholar at the Brookings Institute, wrote in the March 2010 paper, The new global middle-class: a cross-over from east to west:

“Thanks to a long-term downwards trend in personal savings rates from 10 per cent in the early 1980s to approximately zero by 2007, the growth of US consumption has been faster than the growth of US GDP, making it a driver of both the US and global economies. At $10 trillion, US private consumption accounts for just under one-fifth of the world economy. In fact, as a source of demand, it is twice the size of the next largest entire economy Japan in the world.”

But, the financial innovations that unlocked the spending power of America’s middle-class – easy credit and home-equity withdrawals – have been derailed. In an effort to rebuild lost wealth, US households are saving again. However, the void being left by the retrenchment of the US consumer is being met by a changing world dynamic – the rise of the emerging market consumer. This is a theme we plan to focus on over the next several years – finding those globalcompanies that are most likely to benefit from this massive secular trend and theme.

According to J.P. Morgan Securities Research, during the recession that began at the end of 2007, consumption in emerging markets surpassed US consumption for the first time – equaling 32 per cent of the global market share versus 28 per cent for the US.

Purchasing power has shifted because the largest emerging economies, like China and India both with enormous populations, have not only done well economically in the last decade, but personal incomes have risen exponentially.

Moreover, consumers in emerging economies did not assume massive amounts of debt like their counterparts in the developed world and have been insulated by years of conservative fiscal policy resulting in higher savings rates, etc. And, since emerging market banks have been in much better shape than Western banks throughout the financial crisis, they have been able to continue to grow their loan portfolios. As a result, even as the US has gone through a deep recession, China and India have managed to escape relatively unscathed.

Consider the following – last year, China overtook the US as the largest buyer of cars with 13.5 million automobiles purchased, compared to 10.4 million in the US. Domestic air-traffic in India and Brazil rose 21.4 per cent and 16.8 per cent, respectively, year-over year in June, compared to an expected increase of two to three per cent in the US, which was sluggish to flat in the US as most multinational companies are experiencing significant international growth. Coke is offsetting declining US sales with strong emerging market growth 80 per cent of its sales are now international.

Emerging markets now represent the primary growth drivers for companies such as P&G and Heinz. Nestle recently announced that it expects 45 per cent of all its sales by 2020 to be generated from emerging markets. UPS has cited red-hot growth from Asia over the past quarter, with a 40 per cent surge in export volumes, while domestic shipments grew roughly in line with GDP.

The story is not new, but the scale and breadth of its impact is almost too vast to digest. According to World Bank estimates, by 2015, the number of Asian middle-class consumers will equal the number in Europe and North America for the first time in 300 hundred years. By 2021, on present trends, there could be more than two billion Asians in middle-class households. In China alone, there could be over 670 million middle-class consumers, compared with only 150 million today. This monumental new consumer class is emerging at a scale and timing sufficient to replace the forecast shortfalls in US consumer demand growth.

Will rising food prices and accelerating inflation short circuit the emerging markets’ consumption boom? It is unlikely to for long. Currencies will appreciate to lessen the impact of imported goods. Price controls will be put into effect. In essence, all that matters is that wages increase in real terms and, as we have seen in China, wages are on a significant upward trajectory.

Employers and governments will likely have no choice but to keep wages ahead of inflation.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.