Consumers are optimistic in key emerging countries

Consumers in key emerging countries are optimistic about their own prospects this year, sustained by real income growth in most of these markets, and buttressed by high savings levels in some. Discretionary spending will continue to rise among the wealthy, but international brands will be the beneficiaries; yet, local firms will prosper from strong demand for essential goods and services. Meanwhile, income disparities will widen further.

These were the main conclusions of Credit Suisse’s inaugural Emerging Consumer Survey released yesterday.

The survey explored the spending profiles of consumers within the four Bric markets of Brazil, Russia, India and China, as well as Egypt, Indonesia and Saudi Arabia. These consumers represent over 3 billion of the world’s population and make up a combined GDP of more than $10 billion.

The aim was to establish a profile of the spending patterns and preferences of consumers who are responsible for the structural shift in global demand. It follows similar consumer studies made by Credit Suisse in China for each of the past six years.

Vincent Chan, head of China research, pointed out that the income growth outlook in China is better in 2011 than in 2010, and that it is more positive in the country’s 150 second-tier cities than in the three main ones of Beijing, Shanghai and Guangzhou. Also, although the Chinese savings ratio has peaked recently, it is still much higher than in other emerging markets. Interestingly, spending is now “migrating out from basic food consumption to more discretionary items”.

Spending intentions are relatively positive in China for all types of goods and services, from essential through to discretionary items. Demand for computers and smart phones stands out as among the strongest across the survey. Car ownership is still very low but intentions to buy are not, with 30% of high-income earners planning to buy a car, specifically in the premium brand segment.

Another important observation was that housing expenditure is not especially high, despite a very high property-to-income ratio. The reason is that many Chinese in the bigger cities benefitted from buying cheap properties during the housing reform a few years ago when incomes were also rising. Now, people in the second-tier cities have a strong intention to enter the property market.

Yet, the saving culture remains embedded. Over 30% of income in China is put aside for a rainy day, and that propensity rises with higher income. (Curiously, the middle classes save less as a proportion of their income than either the rich or poor). More than 80% of respondents have a bank account.

Chan’s consumer-related stock picks include shoe retailer Belle International Holdings and web portal operator Sina Corporation.

In India, there is a “broad-based optimism on income and consumption across income levels”, said Govindarajan Chellappa, head of consumer discretionary research for India. People in smaller cities are especially sanguine and also more likely to make big-ticket purchases, such as cars and houses. Value-for-money is a key focus at all cost levels – for example, fuel efficiency is far more important than image and power when up-trading a car.

Education spending is still a major priority. Household spending on sending their children to school and university is by far the highest among the countries in 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,” said Chellappa .

Despite a strong savings culture -- only 2% of respondents in India said they had no extra income available for saving -- Indians are apparently becoming more comfortable about borrowing and have greater access to banks and to the world’s fastest growing insurance market than other emerging countries.

Chellappa’s stock picks include education company Everonn, Bharti Artel, and Hero Honda.

The Indonesian consumer is among the most optimistic, with 96% of respondents expecting a rise in incomes this year, said Arief Wana, head of research for Indonesia. Spending on food makes up a large part of the average Indonesian household's budget (29% of income), reflecting the country’s lower absolute level of income.

Property and car ownership are much lower than in the other countries in the survey, but higher income households registered strong buying intentions. Almost a quarter of households said they plan to buy a house in the next two years.

Borrowing is expected to increase from a low base, which should further boost banks and retail companies. The rich, of course, are expected to get richer, and they will support foreign luxury brands. Many of these are newly rich non-Javanese, made wealthy by the commodity boom. Meanwhile, the property market has great potential, according to Wana, because home-owners are likely to move to better quality housing and should have access to the nascent mortgage market.

Wana’s stock picks include Astra International, a conglomerate with a large auto manufacturing business; Bank Rakyat Indonesia; telecom services provider Indosat; and noodle maker Indofood.

The Credit Suisse team drew seven broad conclusions about the three Asian and four other emerging countries.

First, consumers are relatively sanguine about their prospects for the year ahead, so “confidence is high”, especially in Brazil and China. As much as 38% of respondents expected some improvement in their personal finances over the next six months compared to 9% who expected some deterioration.

Second, there is a continued shift towards discretionary (non-essential) spending – which tends to happen when average monthly income exceeds $1,000 (adjusted for purchasing power parity). Unsurprisingly, plans for discretionary spending are greatest in richer countries, such as Saudi Arabia, while household expenditure on essential items is a major component in poorer countries, such as Egypt, India and Indonesia.

Third, “inequality of income is a key issue”, and the “disparity of income within emerging markets is only set to get wider”. This is important because the distribution of income is a major determinant of the types of goods and services bought. Credit Suisse noted that a large proportion of households in all countries still have incomes below $1,000 a month, but that due to their size, China and India dominate at most income levels. For example, the number of high income households in India earning in excess of $2,000 per month is more than twice that of Russia, despite the fact that GDP per capita in India is 80% lower than in Russia.

Fourth, already wide income disparities 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. The conclusion is that absolute growth rates will be strongest at the discretionary end of spending across emerging markets, and where lower income earners have the strongest relative growth rates – Brazil, China and Indonesia -- demand for essential goods and services will be stronger than in the other four countries.

Fifth, improving income levels support international rather than local brands for luxury and big ticket products and services. But, whereas the rich prefer a foreign-name car or perfume, they are less picky when they buy essential items, such as bottled water or dairy products. That means that the growth outlook for local brands is at least on a par with the growth outlook for international brands for essential goods and services – but foreign, well-marketed brands will retain their high status appeal, at least until domestic competitors offer a similar cache.

Sixth, the survey revealed substantial structural differences in the savings culture across these markets. China and India both have strong savings cultures; Brazilian households are spenders. Meanwhile, the outlook for credit growth appears to be strong. Plans for mortgage-backed property purchases are positive across the board (particularly in Brazil, China and Indonesia) as are plans for credit-financed vehicle purchases (Brazil and Saudi Arabia).

Finally, in order to clarify the disparate data and themes, Credit Suisse has drafted an “Emerging Market Consumption Map”. This summarises spending intentions across 14 different types of goods and services for different income groups across the seven markets. It highlights the greater relative demand for essential items in the low income markets (Egypt, India, Indonesia), and shows that spending intentions for discretionary items are highest for the wealthy households in the high income markets (Russia and Saudi Arabia). The continued force of demand and real income growth in China reveals healthy demand across the broadest basket of spending, while Brazil’s focus is towards the discretionary end.

Credit Suisse had contracted AC Nielson, a leading global market research firm, to collect the primary data during summer and early autumn 2010, using a random sampling methodology that produced 13,000 respondents in a variety of locations, and at varying income levels and split evenly between genders. Face-to-face interviews were conducted, eliciting replies to 120 questions over 11 different subjects.