The Forgotten emerging market consumer.

I wanted to write about what brought me to like the emerging market narrative and potential. I think that a recent batch of mitigated performance due to covid and shale oil boom has made a lot of investors forget about the structural characteristics of these markets in terms of consumers and made them focus on temporary characteristics of these markets.

So here are my humble thoughts, from a simple investor and not a PHD: I have a PHD in Putting my Humble Dinero (money in Spanish) in emerging markets since 2013-14 maybe.

The covid crisis has affected consumers very differently in Emerging and developed markets.

-In developed markets, there were lockdowns and wide spread subsidies in form of unemployment checks, small business subsidies and even money given to every citizen in some countries.

-In emerging markets and less developed markets, when the economy was stopped by lockdown, fear or commodity price drops, there was no help for the small business people and for the unemployed (or very little). Suddenly, a lot of people that were consumers in the economy went in economic crisis mode.

As a result, even basic goods like drinks, food or cigarettes suffered heavily and had negative growth in emerging markets as the waves of covid hit, not only because of changing customer habits, but also for a portion of the consumers, because of loss of income.

This unique reversal has made results uninspiring in terms of volume, also with negative FX, and also made investors shun some stocks exposed to a lot of suffering emerging market consumers.

The tobacco companies pulled through because of price rises in the USA and Europe, but had terrible results in emerging markets.

Most large consumer goods companies have shown 0% or worse growth in these countries.

However, the situation is extraordinary. The advantage of Emerging market consumer goods over developed is best described in a upbeat post SAB Miller merger Conference by AB-Inbev in 2018 (https://www.ab-inbev.com/content/dam/universaltemplate/ab-inbev/investors/presentations-pdf-archive/presentations/2018/1.%20CEO%20ABI%20Update_Carlos%20Brito.pdf ). In fact, outside of niche innovative products rapidly gaining marketshare, developed market consumer goods companies need to be more innovative because the markets are saturated,

1-AB inbev had the highest annual organic revenue growth 2012-2017 at 4.6%

Danone (43% of sales in EM+Japan) which is now struggling, was third behind l'Oreal (46% of sales in EM+Japan),

Last in terms of revenue growth were Carlsberg (30.6% EMs), P&G (31% EMs), and Pernod Ricard (over 43%, maybe up to 50% EMs).

A part from Pernod Ricard, having low EM proportion was bad for revenue growth.

2-The projected growth in beer market absolute volume 2017-2027 was unequivocal in terms of countries:

3-Per capita volume beer consumption is 3 times higher in Emerging market as in developed markets.

4-AB inbev posts on Africa's potential in the rationale for the SAB Miller acquisition:

"50% of global population growth to 2050

+1.3B people: adding more than the current India or China population in next 30 years"

I will not even start with the per capita consumption in Africa because it is very very low at the moment.

Volume: the forgotten EM forgotten opportunity:

1-AB inbev had 66% of volume in EMs pre acquisition and 72% post. This makes the company susceptible from FX woes but also nearly immune from some more changing consumption trends affecting mature markets only.

If we take Cigarette Giant BATS, (not a responsible industry but a necessary industry), the volume story is even stronger. As an introduction the US is a bit over half the profit of the company. You would think you are investing in a half US business?

The last line, is the still the main part of the business, shows that it is far from the reality.

In terms of volume, the US is 11% of the business!

The main consequence of this is a macro economic lollapalooza. If undeveloped regions where the majority of the volume is sold experience a higher GDP growth than the US, then the revenue and profit share from these majority regions will get higher and higher compared to the USA, and without any change of volume, good profit growth will be achieved through FX adjusted pricing.

And what are economists predicting? It is consensual to predict much higher GDP and consumption growth in Frontier and EMs than in DMs, including the USA. It is in every long term prognosis publication.

Today, the market has forgotten all of this, and favors tech stocks, because they offer growth. Some global consumer goods companies who struggled for profit growth due to EM sluggish economies are left for cheap.

Tomorrow, if, as predicted, Frontier and EMs post higher economic growth than the west, then we should see over the cycle a nice growth in profits of stocks with huge volume in EMs who have pricing power, and on top of that a rerating.

The last time we had a commodity/regrowth cycle, here were Ab Inbev and BTI's revenue and earnings;

(Yes, hard to see on the BTI chart, but growing profit).

Nowadays, with increasing commodity prices flowing into EM countries pockets and giganto-colossal energy transition mining efforts required, the forgotten EM consumer should stage a come back for these type of stocks.

Please also bear in mind that my blog focuses a lot on emerging markets because it corresponds to a forgotten area and a large part of my portfolio, but I am invested in any type of markets, including some French small caps, and for a nice change I may present some of these companies.