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Credit Suisse Publishes Third Annual Emerging Markets Consumer Survey

Strengthened Confidence among Emerging Markets Consumers but Striking Contrasts across some regions

The Credit Suisse Research Institute today published its third annual Emerging Consumer Survey – a detailed study profiling consumer sentiment within the BRIC nations (Brazil, Russia, India and China) alongside those of Turkey, Saudi Arabia, Indonesia, and, for the first time, South Africa. Together, these consumers represent over 3.3 billion people across the globe. Against the backdrop of improving global sentiment, the survey provides a timely focus on one of the key drivers of global growth - the role played by consumers in the emerging world.

To undertake this project, Credit Suisse again engaged the leading global markets research firm Nielsen to conduct primary research on its behalf. The data set consists of more than 14,000 face to face interviews across eight emerging economies posing more than 125 questions to help establish a profile of their spending habits, future intentions, and the factors that influence them. The interviews were conducted across different cities and rural areas in each country with the aim of establishing a representative sample of gender, age and income bracket among the respondents.

Stefano Natella, Global Co-Head Securities and Analytics Research at Credit Suisse, said: “Our survey provides a unique and detailed analysis of consumer sentiment in the emerging world and importantly an understanding of its underling drivers. Its reflection of the differing demographics, income, and urban / rural characteristics of emerging consumers are vital considerations when it comes to determining spending preferences and the brand positioning of companies.”

Giles Keating, Credit Suisse’s Global Head of Research for Private Banking and Wealth Management, said: “The analysis delivered in this report and the accompanying Emerging Consumer Databook offers information available nowhere else about the global boom in emerging market consumer spending. It underlines the ambition of the Credit Suisse Research Institute to provide our clients unique and proprietary insights. The survey builds upon the Research Institute’s detailed knowledge of trends in emerging markets and complements the recent Credit Suisse Global Wealth Report.”

A presentation outlining the key findings of the survey can be found here. For a copy of the survey report, please click here.

Key Themes
1. Consumer confidence improving…but a picture of contrasts
This year’s survey suggests that confidence among emerging consumers has strengthened over the course of the last year. Of just over 14,200 adults included in the survey across eight countries, 37% thought their personal finances would improve over the next six months and 9% expect some deterioration (a net 3% improvement over last year.) However, the improvement isn’t uniform. Optimism is highest in Brazil, China, Indonesia and Saudi Arabia and lowest in South Africa, Russia and Turkey, albeit improving.

2. The role of income and demographics
The outlook for and the distribution of income has become the key determinant of optimism this year. Accordingly, the countries with the highest income growth expectations show the greatest optimism. Equally notable is the fact that the highest income earners are the most optimistic in every country and in a number of instances these consumers are clustered in the younger age brackets of the working population. Understanding what these younger, affluent and typically more educated consumers is a key investment theme.

3. Discretionary spending back on track
After stalling in our last survey, the long-term structural shift across the emerging economies towards greater discretionary spending that we see as a key megatrend has been re-asserted this year. Removing the burden of rising food prices, and in some areas, weaker currencies, provides a backdrop to this change in fortunes.

Relative momentum is the strongest in the following areas:

Technology: A thirst of technology, smartphones and tablets, is supported by ever increased internet access in the emerging world. To some extent, this growth in smartphone demand comes at the expense of PC and basic mobile phone purchases. Markets where smartphone demand is expected to grow most quickly are Saudi Arabia, Indonesia and China.
Cars: While the increase of car sales has been fairly mediocre over the last few years, the outlook for car purchases is much more positive for the next year than was the case this time last year or the year before. The strongest net increases in expenditure plans are for Brazil, Turkey and China.
Meat: Meat and protein have gained greater prominence on the menu, with strongest improvements expected in Turkey, China and India over the next 12 months.
Property ownership: Plans for buying property over the next couple of years look much more bullish. Specifically, in China, where 20% of respondents have indicated that they expected to purchase a property within the next two years (+4% from last year), and in Indonesia, where 30% of respondents in Indonesia said they had plans to purchase property (+5% from last year).

4. Spending but not borrowing
Given the generally healthier household balance sheets and much lower levels of private sector indebtedness relative to GDP that are apparent across the emerging markets, it would be plausible that low nominal rates would start to feed through to higher rates of credit extension in these regions. However, this is typically not the case. Even in Brazil, where nominal rates have dropped 3.5% since mid-2010 to now, the proportion of spending on credit cards has hardly moved from the 19.2% recorded in 2010.

Brands and income sensitivity
The track record being built by the survey is allowing us to delve deeper into our analysis of brands. We can analyse, with the help of our Databook, brands displaying momentum; where local brands hold sway over global rivals and the income sensitivity of brands. Important themes have emerged: (i) the significance of the unbranded segment of spending; (ii) the resilience of domestic brands in the essential areas of spending space and their attractiveness to acquisitive global companies; (iii) the aspirational quality (or lack thereof) of specific brands in the discretionary space, which plays to the international names. The report identifies the brands that display the right potential growth characteristics relevant to investors and corporates alike.

Country highlights
Brazil: The beat goes on
The Brazilian consumer has been and remains the most optimistic across our survey. High income and low income consumers alike display confidence in the future in a way that, for example, the other major BRIC nations fail to do. This might be surprising given a slower growth performance in Brazil in 2012. However, it has been less a feature of the personal sector, where the labor market has remained healthy and fiscal initiatives have been targeted to support consumption, and monetary policy to stimulate credit growth.

Although the focus on savings among the Brazilian consumer has increased compared to previous years, it is still well below the average and strikingly so when contrasted with the larger economies, such as China and India. This is equally mirrored in their appetite for credit, where the use of credit in property and car purchases can be shown to be the highest. 13% of respondents indicated that their property had been an “all credit” purchase and 28% expected it to be the means of financing the next – by far the highest of the larger countries. Car purchases show a similar pattern.

The focus on discretionary items is typical of the categories of spending showing the greatest momentum – technology, fashion and spirits. The growth in internet penetration stands out across the income scale, having risen from 56% to 76% in the last two years, underpinned by growth in computing. However, the Brazilian consumer is not purely focused on more material items but also spends a higher-than-average share on healthcare and education.

China: An educated consumer
Optimism among consumers in China has remained relatively robust, reflected by an uplift in sentiment in the low income brackets rather than a major change of outlook among the richest of consumers. 43% of respondents expect to see their financial positions improved by 6% compared to last year. This is supported by a substantial change in fortunes among the poorer consumer, with net responses increasing by 10%-20% and would tie in with the initiatives flowing from the Five Year Plan to boost real incomes among the poor.

The attitude toward savings remains unchanged with around a third of income recorded as heading for savings. The manner in which the Chinese consumer saves and how this has changed this year is notable. The role of the stock market gains plenty of focus, though beyond the highest income brackets, direct investment represents a modest role in savings in the wider population. It has also fallen substantially among high income brackets since 2010. In contrast, life products have seen substantial growth, with 23% of respondents saying that they have brought a policy – almost double last year’s level.

The two themes apparent in terms of spending (rather than saving) are technology and education. The increase in spending on smartphones is stronger than in any country in the survey, with numbers showing purchases up 18% versus a year ago. Spending on education runs closely behind with a 13% increase.

India: A sum of different parts
The overall barometer of optimism for India remains relatively robust, though it represents the sum of very different parts with the outlook seen among the wealthy not shared among the poor.

Net balance of consumers expecting their personal finances to improve stands at a healthy 38%, though slightly lower than 42% last year. However, there has been a sharp decline among the poorest and the broader optimism that can be seen across the income scale in Brazil and China is not reflected here.

A key feature that stands out in terms of behavior of Indian consumers relative to other countries is a high absolute and relative allocation of income to education, representing 12% of monthly income in the survey. Momentum behind the education spending continues to increase publicly and the amount of respondents saying they will spend more rather than less on education in its broadest sense is twice the level of a year ago.

The savings culture remains apparent. Two features seem notable in terms of savings channels: an increase in responses on gold and jewelry, and property. Property investment continues to be supported by aggressive promotion and the offering of home loans by the banks. Expectations for the direction of property prices are uniformly positive in the survey.

Indonesia: BRIC becoming BIIC?
Confidence among Indonesian consumers has continued the steady improvement witnessed since 2011. With 43% of respondents expecting their personal finance to improve in the next six months, consumers’ optimism comes only second to Brazil.

However, while the improvement in overall optimism is notable, what is striking is that this increase is typified among the lower / middle earners; with higher earners being less positive. A key backdrop to this has been the 10% increase in minimum wages across the provinces ranging from 3% to 19% versus 2011.

This, coupled with low food price inflation, has helped drive a substantial increase in discretionary item spending. For example, spending in fashion apparel has increased by nearly 25% and holidays by 15%. Technology spend also features, though due low internet penetration levels in Indonesia, the focus currently is on more conventional type mobiles; thereby presenting a more long term opportunity for the smartphone market as high speed internet penetration increases.

Russia: The poor BRIC relation
Russia, in spite of being a BRIC country, continues to lack the characteristics common to the others. Optimism is far lower, income growth poorer and there is far greater disparity between the expectation of the rich and poorer respondents.

Income growth expectations are very modest by the standards of the survey. Against this backdrop and with Russia registering one of the highest forecast inflation rates in our survey, growth in real terms is expected to be negative.

A major hindrance to consumer spending has been the high proportion of income that is devoted to food (close to 30%). This has weighed upon the low income brackets in particular. Hopefully, this burden should begin to lessen - though at present the highest consumer growth potential does seem concentrated in spending more typical of the narrow segment of high income earners.

Amongst the Russia specific features, alcohol consumption is still amongst the highest compared to other markets in the survey. However, the raft of measures aimed at curbing sales in this area has been effective with a 7% and 3% drop in beer and spirits respectively.

The under penetration of sophisticated financial investments, which was highlighted last year, remains. Access to bank accounts has increased marginally from last year, but the use of other channels of investment such as life insurance and the stock market, continues to remain elusive. However, as we noted in the Credit Suisse Global Wealth Report 2012, Russia is a sum of very unequal parts. Save for China, possessing more Ultra High Net Worth individuals across the emerging economies, which for Russia points to a very different pool of savings lying at the extreme of the survey - and very likely beyond its scope.

Saudi Arabia: A strong picture but contrasting fortunes
The Saudi Arabian consumer remains one of the most optimistic, with a net 33% of respondents expecting to see improvements in the state of their personal finances. However, this optimism has slipped slightly from last year. More significantly, we have seen a reversal of what had been a rather broadly based level of optimism in 2011 to a more obvious contrast between expectations for the rich and poor. 56% of the richest respondents expect a financial improvement but less than half of that are at the lower end of the scale.

In 2011, we saw significant increases in public sector incomes, which provided the backdrop to the survey for Saudi Arabia. The minimum wage for government employees was nearly quadrupled – a figure matched in the private sector. This coincided with a range of job creation initiatives and other social provision. It not only contributed to a buoyant consumer position, but notably also increased optimism among the lower and middle income earners. It appears as if this momentum has now declined and optimism has slipped as the positive impact on sentiment is dropping year on year.

Incomes are expected to grow in Saudi Arabia but with growth highest where incomes are highest. Against this backdrop, computers, smartphones, fashion apparel and perfumes stand out. In contrast, low ticket and essential spending such as food and dairy remain low. In our view, there remains a huge structural opportunity in the financial industry as the pool of savings deepens further and providing it can be tapped effectively. The implied savings rate stands at around 30% of growing incomes, only a whisker away from the trend rate of savings in China. The focus remains predominately on savings held in bank accounts (the bulk of which offer zero returns on deposits) or in cash itself.

South Africa: Challenges and opportunities
South Africa is a new edition to the Credit Suisse Emerging Consumer Survey for 2013. Consumer optimism levels in South Africa fall toward the lower end of the survey spectrum. The polarity of experience within the population is concerning. Nearly as many South African consumers (22%) predicted a worse financial position as those who expected some improvement (28%). In this context, we do note 2012’s labor unrest that began in Summer and spread to some other sectors of the economy. Despite broad pay rises for many, it does not appear to have completely assuaged negative perceptions of the financial outlook of low income earners.

Wage growth expectations are close towards the survey average and , are relatively better for the high income groups (around 5% growth expected over the next 12 months) than they are for the low income groups (around 1% growth). Inflation poses a risk to real wages.

With this being our first South Africa survey, we are unable to provide year on year progression. However, we can benchmark the types of spending against the other emerging economies as a whole. Generally activity is more muted in most spending categories. Discretionary areas such as holidays and fashion play less of a role, though bigger ticket items such as property and notably cars do see robust ownership. In terms of the latter, it assumes a considerably larger share of spending than elsewhere and does tie in with the 10% domestic volume growth the industry has been seeing in 2012. As for the technology theme, there are contrasting messages. Smartphone ownership is higher than elsewhere but computers and internet accessibility far less so suggested a high level of concentration of ownership. Greater internet penetration will be needed to support wider growth.

A major distinguishing feature of South Africa is the institutionalized savings and more developed banking system. Financial investment uptake in the region looks extensive and established. Bank accounts appear to be the primary channel of savings, with 88% of those surveyed opting for this route. Life insurance is also a popular choice, with 57% using this as method to save. Interestingly, 25% of South Africans also use the stock market as a savings channel, the highest rate seen in the survey.

Turkey: Potential emerging
Overall optimism in Turkey is at the low end of our survey but has improved since last year and the views being offered by higher income earners is by no means negative. The level of optimism in high income earners is consistent with that seen in Saudi Arabia and hence a potential source for growth. Moreover, spending patterns now look closer to those of a middle-income country, with expenditure on housing and food falling, and that on autos and education rising. A trend of lower inflation and higher growth support more discretionary spend. There is though a caveat to highlight against this in that only 24% of respondents suggested that now was a good time to make a major purchase – the lowest across the countries. Recent consumer tax hikes could be playing a role, particularly with respect to larger ticket purchases.

In terms of the mix of spending, there is a familiar theme with others. Smartphones, computers, internet access, cars and holidays have seen some of the strongest gains. The modest level of internet penetration suggests further scope for growth. Interestingly, recent taxes on alcohol and spirits have not impacted the spending habits of the consumer here and growth has continued. In terms of savings, one feature that remains striking is the relative under-penetration of banking services. With only a fifth of respondents having access to a bank account (the lowest reading in the survey in fact), we would suggest that a structural opportunity exists here as long as deposit rates become more reasonable.