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How China’s millennials are boosting consumption around the world

28 June 2018

Several GAM investment managers highlight the role China’s younger generation is playing within their respective areas of expertise.

By Maitane Sardon,

Reporter, FE trustnet

China’s incipient and younger middle class is fuelling a rise in consumption that is having an impact not just domestically but across global markets, according to several GAM’s fund managers.

As Chinese consumers spend more money on areas including luxury goods, cars, travel or entertainment, companies around the world are reaping the benefits.

Not only has real wage inflation risen over the past decade but adjusted household income has gone up 120 per cent. As such, consumption has grown fast in recent years led by strong income growth.

While some argue the country is no longer an export-led economy, others believe the shift to a consumption-led economy has left it with plenty of room to grow.

“I think the country still requires a transformation from export and investment-led to consumption-led growth, its average consumption as percentage of GDP shows plenty of scope for this to increase and technology is playing an intrinsic role in this,” said GAM fixed income investment director Tim Haywood.

In Haywood’s views, China’s ageing demographic trend is a key driver for this transformation, as they have led to a strong salary increase for Chinese workers of the so-called ‘millennial’ age group.

Chinese millennials, who benefit from this salary increase and have different spending habits than their parents, are a driving force for growth in consumption and, ultimately, for economic growth.

“There are currently 400 million millennials in China. Since the 1980s, when the first millennials were born, China’s GDP has grown more than 20-fold,” said Asian equities portfolio manager Jian Shi Cortesi.

China’s annual GDP growth (%)

  Source: World Bank

Cortesi, who oversees the GAM Multistock Asia Focus Equity and the five FE Crown-rated China Evolution Equity fund, said those reaching young adulthood in the early 21st century not only spend more money on goods compared to their parents’ generation but they are also willing to pay more for quality brands that “offer uniqueness”.


“Millennials spend money on beauty, fashion, travel, entertainment, beauty and automobiles and they like things with cute packaging and funny brand names, although a lot of family-orientated marketing also works with them,” Cortesi said.

The travel industry is also a good illustration of the emerging role of the Chinese millennial and their spending patterns.

GAM’s Asia Pacific investment director Michael Lai noted that Chinese are also spending more on travelling with the number of nights spent in Europe by tourists from China having tripled over the past 10 years.

“Morgan Stanley estimates Chinese outbound travellers could top 400 million by 2020. China’s transition to a higher-income economy will lead to higher mobility and affordability for Chinese citizens to travel abroad, which will be positive for many economies across the world”, Lai highlighted.

"Airlines and hotels are obvious beneficiaries of this trend, as well as companies which operate attractions.

"Luxury goods and duty-free players should also continue to benefit from Chinese nationals contributing to an estimated 70 per cent of the luxury industry’s current growth,” he added.

Millennials are the number one buyers of luxury goods products following the dramatic increase in spending over the past two decades, and their preference for Western brands is benefitting many western stocks.

“The Chinese have always had a special affinity for heritage and tradition, which leads them towards western brands, in particular those with long-established roots in Europe,” noted GAM’s head of equities Scilla Huang Sun.

Share of China’s urban consumption by millennials

 

Source: Fung Business Intelligence

Some of the companies exposed to the growing Chinese middle class, according to FE Alpha Manager Niall Gallagher, include European firms Richemont – which owns Cartier and other watch brands – or LVMH, owner of the Louis Vuitton, Moët & Chandon and Hennessy brands.

LVMH is one of the top holdings of the €1.9bn GAM Star Continental European Equity, one of the funds Gallagher oversees.


 

Other European companies taking advantage of the increase of consumption by Chinese nationals is Swiss manufacturer of elevators Schindler, with two-thirds of the world’s elevators each year being installed in China.

“This growth in middle-income households combined with urbanisation, denser cities and the desire for higher quality accommodation are all driving strong, long-term, sustainable growth in this area,” said Gallagher.

He added: “China in particular is very important in terms of its impact on the world economy, indeed some of our team has recently been visiting companies in Shenzhen.

“By some estimates 80 per cent of middle class household growth globally over the next few years will come from Asia, with the bulk of that from China.”

China’s Household Disposable Income

 

Source: Federal Reserve Bank of St. Louis

Commodities is another sector that the growing middle class is also having an impact on, as higher spending demands more raw materials.

“China’s rapid growth, high energy per unit of GDP requirements and rapid urbanisation have kept energy and industrial metal prices well supported,” said group chief economist Larry Hatheway.

Shifting perceptions about Chinese growth have therefore increased the volatility of those same commodities and, by extension, Chinese demand for commodities has boosted the fortunes of ‘commodity currencies’ such as the Australian dollar, the New Zealand dollar or the Chilean peso, said Hatheway.

“As China reduces restrictions on its capital account, investment opportunities there are opening for foreign investors.

“However, the opportunity set remains small relative to the size of the economy, and many investors prefer to ‘play China via commodities or dual listings such as US American Depositary Receipts (ADRs).”

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