Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Will Ballard, head of emerging markets at Aviva Investors looks at how millennials are disrupting emerging markets.
Millennials in advanced economies have come under pressure in recent years, thanks to stagnating wages, rising house prices and escalating student debt. But an altogether different trend is taking place in many emerging markets where millennials are seeing their prospects rapidly improve. This in turn is creating an investment opportunity, as millennials in these countries are becoming hugely influential on the prospects for emerging market equities.
There are companies and sectors which are particular beneficiaries of the consumption habits of millennials, with smartphones and technology being at the forefront. Like their counterparts in developed markets, emerging-market millennials use smartphones intensively, often favouring local models, or those imported from other emerging markets, over Western brands. For example, Chinese-made smartphones from Huawei, Xiaomi and Lenovo are seeing fast-rising sales in the Indian market.
Telcos and Transport
New telecommunications operators have also emerged to offer mobile data packages to this demographic, disrupting incumbents that tend to offer patchy service. Mumbai-based Reliance Jio, for example, offers data at an incredibly low cost to win millennial customers. Time will tell whether it is successful over the long term as telecoms is a competitive industry. However, what’s clear is that telecoms operators that don’t cater to the needs of the younger generation are going to fall behind.
Another sector which is going through change is transportation. As in many emerging markets, public transport in India is quite poor, and as the population grows more affluent there has been a rise in the number of private vehicles, especially two-wheelers. In urban areas – and in wealthier parts of rural India – there has been a demand for vehicles that stand out from the crowd and manufacturers are keen to capitalise on this trend. For example, automaker Eicher Motors, which acquired the British Royal Enfield motorcycle brand, has seen strong demand from young consumers eager to differentiate themselves amid the flocks of identikit mopeds on Indian roads.
Shaping the Political Landscape
As we have seen in developed markets too, millennials in emerging markets are increasingly shaping the political debate in their country. A large cohort of young voters pushing for change has contributed to reform efforts in several emerging markets, bringing advantages for foreign investors. In Brazil, huge street protests, orchestrated by young people on social media, were a big factor behind the demise of President Dilma Rousseff, who was eventually impeached in August 2016 following a corruption scandal.
The ousting of Rousseff led to hopes of economic and political reform and the MSCI Brazil Index rose a remarkable 66% in 2016, compared with only an 11% rise in the wider MSCI Emerging Markets Index.
Meanwhile, political parties are increasingly shaping their policies to attract the millennial vote, or governments are driving through changes in response to how millennials would like to see their country run. For example, in response to Beijing residents being unhappy with the level of air pollution the government has reduced the amount of coal being burned, while the 19th Party Congress in China highlighted that the government recognises that millennials value quality of life, not just ever rising GDP.
Emerging market equities present a number of investment opportunities, but they do not come without risks, and millennials bring new risks to the table. For this reason, it is important that investors look at companies and countries on a case-by-case basis. There are a number of Chinese companies which are benefitting from the consumption, behaviour and attitudes of millennials.
Chinese millennials are a hugely influential group of consumers: they number 415 million, more than the entire working populations of the US and Western Europe combined, and over the next 10 years their aggregate income could rise by $3 trillion. Their growing influence in the economy and increasing spending power means they will be critical in determining the performance of the growth of new corporate giants, the so-called BATs; Baidu, Alibaba, Tencent, which offer cutting-edge internet platforms and smartphone apps.
By collecting data on the huge cohort of Chinese millennials – who are on the whole more relaxed about data protection and privacy than their Western counterparts – these technology companies are developing new innovations in artificial intelligence, as well as fintech platforms such as peer-to-peer lending.
On-line gaming and messaging is also being driven by the millennial generation; that’s benefiting companies like Tencent and NetEase. Tencent’s WeChat app has 800 million users. The whole population is using it, but millennials are more intensive users compared with their parents. WeChat offers a seamless online-to-offline experience, satisfying millennials’ demand for convenience. Users can communicate with friends and family through calls and video-chats, book taxis and overseas holidays, make restaurant reservations, play games, pay bills and purchase items at physical shops – all without ever leaving the app.
Be Aware of the Risks
Millennials will account for half of the global workforce by 2020, meaning they will be one of the most influential groups in shaping the economy and society, including consumption habits, policy and how companies may want to market and brand themselves. They are disrupting traditional industries and companies are having to adapt. This presents investment opportunities, but it also presents new investment risks. This trend makes it ever more important for investors to remind themselves that emerging markets are not a one-size-fits-all solution, and instead need to carry out thorough due diligence at a country, sector and company level.
Disclaimer
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