2011 Cabot Investor Conference - Middle Class Expansion
Middle Class Expansion in the Emerging Markets Presented by: Rob Lutts, President & CIO Tim Moore, CFA, Portfolio Manager Dennis Wassung, CFA, Portfolio Manager
Presented by:Robert T. Lutts, President & Chief Investment OfficerCHINA VS. UNITED STATES
United States versus ChinaTAX POLICY IN USA TAX POLICY IN CHINA– U.S. corporate tax high – Very immature tax policy– City, State and Federal – No real estate taxes sales tax, capital gains, – Low corporate taxes social security tax, – Low income taxes dividend tax and more – No social security tax,– We are not undertaxed only modest obligations
United States versus China US Debt Burdens China Government Large and Growing Finances are Strong• US has debt close to 90% of • Total government debt is GDP much less than US – estimates• Off balance sheet obligations around 40% of GDP of Social Security and • Average Chinese citizen healthcare could be larger avoids debt than $14 trillion debt • Foreign Exchange Reserves• US attitudes toward debt are are over $3 trillion excessive • China has flexibility• So, US debt could be 2X GDP
Incentives for Entrepreneurs are High• High rewards and much wealth are there for those who take risk in growing capital.• Government policy encourages capital investment.• Tax policy is favorable for investment.• Infrastructure costs are low in China.• Cost structure still very favorable for all businesses to move operations to China. Two reasons: 1. Lower costs 2. Enlarge potential markets
China and Many Other Emerging Markets Favorable for Capital Growth• Over past ten years, Emerging Markets outperformed developed markets by 10% per year.• We anticipate this to continue once money comes back to equity markets.• China will eventually open up its currency, and this will help China grow – fully convertible currency.• China continues to take advantage of global opportunities – buying in Brazil, Greece, and other troubled areas.
Presented by:Tim Moore, CFA, Portfolio ManagerEARLY INNINGS AND MYTHBUSTERS
Early Innings of Growth• Young Stages of Urbanization & Localization of Brands, Services, Products. Vast “Window of Opportunity” ahead.• Middle Class = 2b people w/ $7 trillion annual spending could reach $20 trillion in 2020 (2x that of US today).• EM Population living in cities might grow +45% next 20 years.• GDP growth of EM is 3x that of Developed Markets for 2011 & 2012 expectations (+6% vs 2%).• Not just an “outsourcing” region anymore. They are developing their own technology and innovating.
Myth versus Reality Myths Reality• It is a lot of people, but not • EM is 55% of world’s GDP much economic growth growth and 45% of GDP but• Only speculators or risky only 17% of World Mkt Cap people invest there! • EM had record $95b inflow in 2010 for Equities• Those countries have so much debt! • EM has the least amount of Debt/GDP of any region• Their stocks do not perform better than Developed • EM stocks outperformed US (S&P 500) by 12%/year on countries average over last 10 years• Currency is too volatile • Broad basket of EM nations reduces Currency Risk
“Catch-Up” Spending toAccommodate the Middle Class China is 60% of this $6 trillion expected spending 2010-2013
What Else?• Credit Cycle, Urbanization & Home Purchasing affects ALL industries. “Halo Effect” lifts growth of Retail, Construction, Energy Needs, Infrastructure, Banking, Healthcare.• Multinational Companies only average 11% of sales exposure to EM (highest are Nokia, Nike, Suzuki, Hyundai, Boeing, Anheuser-Busch, Philip Morris Intl).• Much better accounting practices & disclosures today.• Supportive valuations of stocks along with dividends.• Strong balance sheets and raising rates to curb inflation.
Presented by:Dennis Wassung, Jr., CFA, Portfolio ManagerTRANSITION FROM “MADE IN CHINA”TO “CONSUMED IN CHINA”
Emerging Markets Middle and Upper Class to Surpass Developed Markets by 2015 6% of 2000 EM population, growing to 22% in 2020
Emerging Markets Consumption is Growing on a Global Scale
China’s Auto Market Is Now World’s Largest 10-Year Compound Growth of 24% -- 2M to 18M units!
China Healthcare Industry10-Year Compound Growth of ~16%$350 5.0% 4.9%$300 4.8%$250 4.7% 4.6%$200 4.5%$150 4.4%$100 4.3% 4.2% $50 4.1% $0 4.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 China Healthcare Expenditures (US$, billions) % of GDP (RHS)
No Longer Just “Made in China”• China is now estimated to be the world’s largest consumer of luxury goods – with 22% share of the 2010 global market @ $13 billion (overtaking Japan)• China’s Retail Sales of Consumer Goods growing 17% versus GDP growth of about 9.5%• China’s Automobile Sales topped the U.S. in 2010, becoming world’s largest car market• World’s largest Internet user population, leading to growing eCommerce industry
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