Demand trends are some of the most influential factors that drive returns for investors in equity markets. Between their ability to drive sales across a variety of sectors throughout a value chain, and the way in which they help us understand which currencies and nations will benefit most from the next economic cycle, demand trend analysis helps us to build fundamentally sound investment portfolios.
One of the most important trends that we can then follow is that of the growth of middle class spenders in different markets, and how it is that their emergence represents a major increase in a given economy’s capacity to consume. By then looking at how it is that these emerging buyers will likely spend their new wealth, we can start to predict where it is that sales growth (and therefore dividend returns for investors) will materialize going forward. This is epitomized by the determination of when it is that an individual truly becomes a member of the middle class, and how it is that their inclusion into the demographic segment can impact our economic research.
Consumers are first considered to represent an emerging middle class once they start to earn between $1,000-$3,000/month in income. In this lower bracket, consumers have been shown to demonstrate a strong desire to save up their earnings, and to try and better establish themselves in society by building up a base of wealth. From there, savers that cross over the $3,000-10,000 income start to show a greater tendency to spend their wealth rather than save it. This tendency to spend then increases over time, meaning that a middle class population that has been established for a longer period of time is likely to spend more money than one that has just entered the demographic.
Once we have determined the existence of a middle-class consumer demographic, it is interesting to notice just how easy it is to predict the general consumption habits of these groups. Specifically, they all tend to purchase cars, financial services products (to finance their new purchases and to manage their developing wealth), and consumer goods (but not necessarily luxury goods). This increase in demand then manifests throughout the value chain, as car suppliers require input materials (mainly commodities), financial service companies require technological infrastructure, utilities companies begin adding on services to consumer groups (ie. Cell phone data plans or extended cable television packages).
Overall, the trend results in a situation where an economy that was previously dependent on exporting products to meet external demand will begin establishing its own internal base of demand, and begin balancing out its export incomes with import payments. These transactions create a fundamental value within the economy itself, and make the currency price more independent from external influence. The end result is a fundamentally stronger investment opportunity.
In looking at how it is that middle-class consumption habits are worth so much to an investment portfolio, we would now want to take a moment to understand where it is that the ‘sweet spot’ is emerging over the next decade, and how it is that we can take advantage of the trend to realize returns. Over the next investment cycle, economics are seeing favorable middle class growth trends emerging in China (most of all, with a 100% increase in middle class participation expected over the next decade), Latin America (largely in technology and financial services), India (car and consumer goods sales), and Africa (consumer goods and technologies).