Consumption in emerging markets offers opportunities despite turmoil.

Short-term headwinds have overshadowed revenue growth in the consumer goods sector in emerging markets, but they have not altered it. The Credit Suisse "Angry societies – Multipolar world" Supertrend identifies opportunities presented by social change.

Emerging markets have key advantages

With exports making up a third or less of GDP, most emerging markets (EMs) tend to be less exposed to trade tensions. These countries also have two key advantages: They can rely on a young and growing population and a rising middle class.

In addition, social change offers security and defense companies opportunities for increased spending in physical and cybersecurity-related products and services after an increase in terrorist and cyberattacks. Companies focused on security and defense and on emerging market consumers should benefit accordingly.

Revenue growth in the consumer goods sector remains solid

Emerging market equities are currently under pressure as a result of various negative factors such as a stronger US dollar, political developments and negative sentiment driven by the turmoil in Turkey and Argentina. Furthermore, the trade dispute has also been weighing on EM sentiment. This is despite the fact that EMs are not overly exposed to global trade except for export-oriented countries like South Korea and Argentina.

Finally, revenue growth for consumer stocks has declined recently but remains at healthy levels, particularly with regard to discretionary spending. EM consumer stocks were unable to escape these headwinds and saw their share prices suffer.

Conditions for strong revenue growth in place

The long-term fundamentals for strong EM consumer growth have not changed: A young and growing population, a growing middle class and urbanization should remain strong consumption drivers. Together with the increasing penetration of smartphones, this provides a strong backdrop for online shopping.


Recent decline in revenue growth in the consumer goods sector

Last data point 05/10/2018.
Source: Bloomberg, Credit Suisse

Online trade drives consumer behavior

Online shopping is already very common in China. According to the Credit Suisse Emerging Consumer Survey, more than 20 percent of retail spending is done online. And according to PricewaterhouseCoopers (PwC), a consultancy, online retail sales growth rates in mainland China should stay at around 21 percent per annum between 2017 and 2021. E-commerce growth in other EMs is expected to follow suit, with the outlook for Latin America especially attractive.

Overall, the online channel provides an additional opportunity for companies to increase sales beside the traditional channels. Especially in categories such as luxury goods and fast moving consumer goods or groceries, where penetration is currently low. For example, Want Want China, a Chinese food company, doubled e-commerce sales in each of the last two years. Moreover, e-commerce has accounted for one-third of revenue growth in dairy and beverage, providing further evidence of the undisputed potential this channel offers.