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Credit Suisse introduces the Emerging Consumer Survey
The survey produced by the Credit Suisse Research Institute seeks to establish a unique profile of the spending patterns and preferences of consumers who are at the heart of a structural shift in global demand.
To undertake this project, Credit Suisse engaged the leading global market research firm AC Nielsen to conduct primary research on its behalf. 120 questions, over a range of 11 different subjects, were included in the survey and put to some 13,000 respondents of varying location, gender and income levels.
Fawzi Kyriakos-Saad, CEO of Europe, Middle East and Africa at Credit Suisse, said: “Credit Suisse’s overall commitment to emerging markets was a key driver of conducting this study. We are committed to developing thought leadership to provide our developed and emerging markets clients with insights on future trends and their implications for the global economy and financial markets.”
Stefano Natella, Head of Global Equity Research at Credit Suisse, noted: “The survey provides both regional and global investors a unique bottom-up perspective of the drivers at the heart of the emerging consumption story. In introducing the Credit Suisse Consumption Map, the report sets out the considerations for what to invest in and where.”
Giles Keating, Head of Private Banking Research at Credit Suisse, said: “The Credit Suisse Research Institute is dedicated to providing not only world-class analysis, but also unique proprietary data in key investment areas. The Emerging Consumer Survey offers information available nowhere else on the crucial theme of new consumer markets, and complements similar Credit Suisse data sources including the Global Wealth Report and the Global Investment Returns Yearbook."
(1) Confidence is high: The survey reveals consumers in the emerging world are relatively confident on their outlook for the year ahead: 38% of survey respondents expected some improvement in their personal finances over the next six months compared to 9% who expected some deterioration. Consumers in Brazil and China are the most confident.
(2) The shift towards discretionary spending continues: Demand for essential items (such as protein consumption or mobile phones) increases rapidly off very low income levels but beyond average monthly household income of around USD 1,000 (adjusted for purchasing power parity, PPP), consumption of essential goods and services tends to tail off in favor of more discretionary items.
Consistent with this, the survey results indicate the greatest proportion of spending planned on discretionary items occurs in relatively rich markets (Saudi Arabia), while spending on essential items is a major feature of poorer markets (India, Indonesia and Egypt).
(3) Inequality of income a key issue: With the path of income a key driver of consumer preferences, a detailed appreciation of the distribution of income is a critical aspect of our analysis. We find a large proportion of households in all countries still have incomes of less than USD 1,000 a month (adjusted for PPP). At the same time, given their sheer size, China and India dominate a significant proportion of the universe at most income levels. For example, the number of high income households in India earning over USD 2,000 per month is more than twice that of Russia despite GDP per capita 80% lower than Russia.
Our survey suggests the disparity of income within emerging markets is only set to get wider. We conclude that in general, absolute growth rates will be strongest at the discretionary end of spending across emerging markets. However, where lower income earners are seeing the strongest relative growth rates in incomes, specifically Indonesia, China and Brazil, demand for essential goods and services will prove relatively stronger than in their counterparts elsewhere.
(4) Real income growth: Income disparities – that are already wide – are set to increase as the high income brackets are expected to continue to see much greater growth than the low income brackets in all markets. Two broad conclusions are: (i) over the next year, absolute growth rates look likely to be best supported at the discretionary end of spending; and (ii) essential goods and services look set to achieve better relative growth in Indonesia, China and Brazil where positive real income growth in the lower income bracket prevails.
(5) International versus local brands: The survey shows there is a clear and consistent pattern in consumption of branded goods as income levels improve. The survey found that international brands have the upper hand in the premium ratings at the discretionary end of the spectrum (cars, perfume and fashion, for example). But, for essential items (such as bottled water and dairy products), the preference for international brands over local brands is not particularly strong whatever the income. Therefore, the growth outlook for local brands is at least on a par with the growth outlook for international brands for essential goods and services. International brands offer greater growth potential than their local peers in the discretionary space.
(6) Credit, savings and investments: Consumption rates clearly have implications for savings patterns. The survey notes substantial structural differences in the savings culture across these markets. China and India both exhibit strong savings cultures; Brazilian households prefer to spend rather than save. The outlook for credit growth appears to be strong: Plans for mortgage-backed property purchases are positive across the board (particularly strong in Indonesia, China and Brazil) as are plans for credit-financed vehicle purchases (a notable feature in Saudi Arabia and Brazil).
(7) The Credit Suisse Consumption map. In order to draw together some of these different ideas and themes, we present the “Emerging Market Consumption Map”. This summarizes spending intentions across 14 different types of goods and services for different income groups across the seven markets. The map highlights the greater relative demand for essential items in the low income markets (India, Indonesia and Egypt). Spending intentions for discretionary items are highest for the wealthy households in the high income markets (Russia and Saudi Arabia). The ongoing strength of demand and real income growth in China sees healthy demand across the broadest basket of spending. Brazil also sees a degree of breadth but the focus is towards the genuinely discretionary end.
Brazil: an appetite for life
Brazilian consumers rank as the most optimistic: 63% of respondents to the survey said they expected an improvement in their personal finances over the next six months.
Real income growth in Brazil looks set to be positive across all income groups (over the next 12 months). The numbers range from 5% real income growth for the lowest income groups to just over 12% for the highest income bracket. The optimistic outlook suggests strong support for discretionary spending. Consumer purchasing plans for cars, for instance, as well as credit to finance vehicle purchases, are among the highest of the countries covered in the survey. With this backdrop, moves by the Brazilian central bank to raise the risk weighting on car loans look very prudent.
The focus on discretionary spending in Brazil is mirrored in relatively low saving rates. Savings as a proportion of income make up only 10% in Brazil compared to 31% in China. Arguably, this is a legacy of the high inflation periods of the past couple of decades. The high focus on real assets such as property (financed through credit) would be consistent with this. Property ownership is the second highest in the survey.
A far greater prioritization of healthcare spending is also striking. Household expenditure on healthcare in Brazil (9.8% of income) is nearly twice that of China, at 5.7%.
China: from saving to spending
The outlook from the Chinese consumer is optimistic. Confidence in the outlook for income growth underpins very positive purchasing intentions. The strong positive real income growth of the past 12 months is expected to continue and accelerate over the year ahead. However, real income growth is skewed towards the high income bracket; with the top end income bracket in China expressing more optimism than any income bracket in the whole survey.
Spending intentions are relatively positive in China for all types of spending, from essential through to discretionary items. Demand for computers and smartphones stands out as among the strongest across the survey. Car ownership is still very low but intentions to buy are high. 30% of high income earners express an intention to buy a car, specifically in the premium brand segment.
Despite the growth in consumption, the desire to save still stands out. The survey suggests over 30% of income in China is saved, and the propensity to save rises with higher income. Reflective of such a savings focus, over 80% of respondents possessed a bank account – a feature apparent in both low and high income earners.
Egypt: feeling cautious
Egypt is the only country in the survey that registers net negative expectations for the respondents’ personal finances in the six months ahead. Egyptian consumers appear particularly downbeat on their prospects: 38% predicting a worsening versus 12% forecasting some improvement in their financial position over the next six months. However, this sentiment does not necessarily tally with consumer spending, which has remained solid. It is likely that macro factors of high inflation and currency devaluations, and possibly political uncertainty, have negatively influenced consumer responses to the survey.
The bulk of consumption is clearly skewed towards essential spending (given the low income nature of the economy). However, the financial prospects for the relatively higher income groups are improving.
India: financial sophistication
High inflation has weighed on real income growth over the past year and looks set to do so again over the next year. Food price inflation has been a major negative. Current spending and spending intentions remain heavily skewed towards essential items.
Nevertheless, a priority that stands out for the Indian consumer is education. Household spending on education is by far the highest within the survey at around 7.5% (more than twice that of Russia, at 3.1%). Partly, this reflects that the household has to compensate for low public sector spending on education as well as the relatively high school-age population in India, but it also reflects the importance attached to education by the household.
Savings are clearly another important part of the allocation of Indian household income: Despite relatively low average GDP per capita, only 2% of respondents in India suggested they had no extra income available for savings, compared to 72% in Egypt and 52% in Brazil. In addition, a significant proportion of households have a bank account. Life insurance policies also featured highly, in stark contrast to other markets. The Indian insurance market is the fastest growing in the world and the seventh largest. Tax incentives are a stimulus to growth.
Indonesia: looking beyond the essentials
The household budget to date in Indonesia is dominated by expenditure on food (29% of income) which is reflective of the lower absolute level of income in Indonesia. However, the survey reveals households are optimistic as real income growth is expected to be positive in the 12 months ahead.
Spending intentions indicate continued strong relative demand for essential items (such as dairy and bottled water) but there are signs of broader types of consumption developing given the support from positive real income growth.
Property and car ownership are exceptionally low relative to the other countries in our survey, but the higher income households register strong buying intentions: Nearly a quarter of households in the survey said they plan to buy a house in the next two years; nearly half of the high income earners intend to replace their existing ‘two wheeler’.
Russia: the under-banked consumer
Relative to the other BRIC markets, the cyclical outlook for the Russian consumer is somewhat less optimistic, on the whole, as falling real incomes have weighed on sentiment. However, two specific features emerge from the survey.
First, the high income consumer looks likely to support discretionary spending. Positive real income growth for the high-end earners means that intentions to purchase cars and property rise steeply at the top of the income scale as does the intentions to take foreign holiday.
Second, consumers seem surprisingly under-banked and under-serviced by financial products.
The survey showed that only 24% of households in Russia had bank accounts compared to 37% in Indonesia and 80% in China. On many metrics, infrastructure in Russia is much more advanced than it is in many of the other emerging markets but, when it comes to financial infrastructure the market scores badly. Stock market investments or life insurance policies barely register for the average household. The opportunities for the banking sector to expand both in reach and product offering seem considerable.
Saudi Arabia: a tale of two consumers
Saudi Arabia has by far the highest GDP per capita of any of the countries we surveyed but a clearly unequal distribution of this income. This makes for consumer activity that has potential for growth among lower ticket items, but also discretionary items and financial services given the pool of liquidity at the high income end.
Discretionary items that stand out by way of high spending intentions are cars, particularly among the rich. This is despite ownership being the highest of the countries surveyed.
Expenditure on entertainment (accounting for over 6% of household income) is high compared to other emerging markets. Indeed, more is spent on entertainment than healthcare and education. Healthcare expenditure is relatively low (6.0% of total income). Public provision is a factor, but strong growth in the over-65s population (estimated at 21% between 2010 and 2015 according to the US Census Bureau) puts the onus on the private sector to fund rising healthcare requirements.
The Saudi consumers are major savers: At 21% of income, only the Chinese consumers allocate more. The contrast with the Chinese consumer is the type of savings – there is little direct stock market investment; cash is the dominant asset with 20% holding cash. Only 52% of households in the survey indicated that they had a bank account. There is clearly scope for financial services to expand: Intentions for rising credit card usage and mortgage financing suggest they will.