2012 Investing Trends: Population and Wealth Dynamics

Over the last two articles (bargain shopping & investing), we’ve discussed how it is that the North American consumer is changing to favour thrift and savings. Across the ocean, the Chinese consumer is entering an entirely different trend. Over the course of 2012, investors are expecting to see an increase in discretionary and luxury spending coming from the Chinese market.
Realistically, increased discretionary from the Chinese market is nothing new. Companies like Yum brands and MacDonalds have been showing fantastic returns from their expansion into these markets already. Besides having such a huge population size, China is beginning to develop a goods-hungry middle class.

Chinese customers have been known to regularly flock to stores to purchase luxury items, fashionable goods, and even fast food, as part of a developing life-style. Realistically, we are beginning to see a trend of spending that is synonymous with the economic boom that the country itself is experiencing overall.
Historically, investors have benefitted from Chinese growth by investing in commodities. However, recent fears of a collapse in the Chinese growth engine have caused commodities to flounder. For 2012, we instead want to focus in on consumer goods.

Companies like Yum Brands have experienced growth by as much as 50%, driven entirely by Chinese consumption. Starbucks has been growing into China, and has seen it as a means of revitalizing that company’s ability to grow. These food and beverage companies provide the most extreme example of how much the Chinese consumer wants to spend on discretionary goods.
Alternatively, as the middle class emerges, there becomes an opportunity to invest in fashionable items and luxury goods. As Apple grows into the Chinese market, there is an opportunity to see renewed growth into the consumer technology market. Luxury clothing companies also present an opportunity to invest in the consumer’s desire to stay trendy, and to show off their new and growing wealth.
Again, the opportunities are endless, but we need to remember to narrow down our focus, and limit our exposure to this particular trend to being within the reason of diversification. If you’re already exposed to MacDonalds in North America, maybe expanding into Yum brands is a bit counterproductive. However, you might be able to invest in a Mutual Fund that gives exposure to both of these companies, and therefore gives you broad, diversified exposure to the Chinese consumer.

Combine this with a stable North American portfolio, and you should be able to successfully introduce the trend exposure, without becoming overweight. Alternatively, ETF indexes can provide industry or country-wide exposure to China, without requiring you pay management fees for the incremental risk.
Remember, we want to phase this kind of exposure into our portfolios with as little impact as possible. This means that subtle shifts to the portfolio will have a better long-term impact, and help us to maintain the security of our investments over time.