Practical analysis for investment professionals
16 January 2015

The Coming Consumption Boom from the Emerging Middle Class

What does meat consumption tell us about the future of the world economy?

Vikram Mansharamani, author of Boombustology and lecturer at Yale University, argues there is a great insight to be gleaned from trends in animal protein intake in emerging markets, even in highly vegetarian India. To tell this story at the recent India Investment Conference, he started by comparing GDP and population sizes among advanced economies and emerging markets.

Instead of looking at countries by physical size, Mansharamani viewed them by GDP — the United States, Europe, and Japan are bloated relative to their geographic share of the world map, whereas India and Africa are shrunken. Then, he looked at countries and regions in terms of their population, which reduced the sizes of the United States and European Union, and inflated India, China, and Africa. His argument: population will be the next big asset to drive growth.

An advocate of the demographic dividend, Mansharamani focused on Asia and Africa, where population is expected to grow the most. These regions have seen a rising middle class, which is necessary to propel them towards a higher growth trajectory. Twenty years ago, 75% of the world’s consumers were in the developed world, Mansharamani said. Today, that has tilted toward emerging countries by a similar proportion. Based on per capita GDP and population size, Mansharamani identified the “Future 15” economies that will drive the next consumption boom: India, Pakistan, Nigeria, Vietnam, the Philippines, Egypt, Indonesia, Ukraine, Algeria, Thailand, Iran, China, Peru, South Africa, and Colombia. The average per capita GDP of these countries is US$4,100.

For Mansharamani, the inflection point in the coming consumption boom is a per capita GDP of around US$5,000. At this point, a country’s animal protein consumption takes off as income increases. This in turn will raise demand for grain to feed livestock. As a sign of this, China has been acquiring poultry farms and agricultural land overseas. And yes, even Indians are expected to increase their animal protein intake, though at a slower velocity.

Any country that passes through this inflection point sees increased spending on food, travel (especially air travel), health care, and education. The demand for these services will rise drastically and could lead to major investment themes in the emerging markets. Each of these “Future 15” economies will strive to increase the land under cultivation and also increase the land yield. This will create a scarcity of agrochemicals, making countries in possession of fertilizer inputs potential superpowers. However, rising food prices can also create social unrest, as seen in the Arab Spring. He noted that historically, when the United Nations food price index crosses 210 and stays above it for a sustained amount of time, the world sees periods of social unrest.

Mansharamani also spoke about how to recognize potential bubbles. One good indicator is hubris, which, he argues, is easily visible in the race to build the world’s tallest skyscrapers. The completion of landmark towers — for example, the Empire State Building in New York City in 1931, Petronas Towers in Malaysia in 1996, and Burj Khalifa in Dubai in 2010 — have been associated with financial crashes, recessions, and economic stagnation. This year China is expected to open the Shanghai Tower, the world’s second tallest building — raising the question of whether its economy is on the same path. However, he noted that the current rapid oil price decline does not represent the bursting of a bubble but a demand-supply dynamic arising from slowing world growth, especially in China, and increased oil production in the United States.

What does this all mean for asset allocation? When it comes to investments, Mansharamani said, one should be thematic rather than sector or geography specific. He believes that due to the consumption dynamics, individual themes will play out in sectors such as energy, infrastructure, water, land, and education, among others. In the near term, there won’t be an alternative to gold and oil, which will keep demand high and, in turn, push their prices again. In the Indian context, consumption-related sectors such as banks and autos are expected to do well.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Kunal Sabnis, CFA

Kunal Sabnis, CFA, is a senior research analyst at VEC Investments.

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