Ben Aris in Moscow -
Winds of uncertainty are blowing again and many in emerging markets have put off big-ticket purchases as a result. However, a survey from Credit Suisse released in February found some of these markets have progressed and diverged to such an extent that talk of wider "trends in emerging markets" is becoming increasingly meaningless.
"Consumer sentiment is softer than in our 2013 [survey] and, in that respect, consistent with the less supportive macro cyclical backdrop. There has been a significant fall in the number of consumers currently willing to make a major financial commitment," Richard Kersley and his team said in the report on the bank's annual survey of emerging market consumer spending habits. "But the profile of the emerging consumer differs vastly within and between countries... Generic judgments are meaningless."
The problem is that some "emerging markets" (EM) like Russia are now classed as "high income" by the United Nations Development Programme and are considered to have already emerged. These countries are now entering a period when spending starts to plateau, as life become increasingly "normal".
Others, such as China and India, are just as clearly still at the start of the process and in the fast growth catch-up phase. The differences are neatly captured in the "S" curve of discretionary spending where Russia is three-quarters of the way up and China and India still near the bottom. A middle class is clearly discernable across all emerging markets, it's just that the size and wealth of these middle classes vary greatly from market to market.
In China's case, it's the youngest workers that make the most money; experience of working in the old system is a material disadvantage. In Russia, reforms have been going on long enough that the middle aged already make up the bulk of the middle class.
"In our 2011 survey, we estimated 27% of BRIC households earned between $1,000 and $2,000 a month. This figure has now risen to 32%, which represents an increase of roughly 60m households into this middle income bracket," Credit Suisse says. "But the nature of the holders of income is crucial. The income levels across these economies vary enormously, shaping the marketplace and product opportunities. For example, China has a broad base of households across the income spectrum whereas the low income consumer typifies India. Brazil has more of a middle class than Mexico."
Drilling down into the details, the differences in the income spread between the different markets become obvious. In terms of the penetration of spending in the three main categories identified by Credit Suisse (essential, useful and discretionary), Russia is ahead of the EM average on "essential spending" in every category except mobile phones and carbonated drinks.
The low spending on mobile phones is partly due to the fact that Russia's telecommunications sector is more-or-less mature and so prices are falling versus income. On the flip side, the spending on meat in Russia is almost twice that of everywhere else, a reflection of not only bad Russian diets but also higher incomes.
The "useful spending" patterns are even more interesting. Again Russia is well ahead of the pack on most things, most noticeably internet and computers, where it trails only Saudi Arabia. However, Russia lags on life insurance and healthcare.
Three of the Kremlin's biggest reform failures has been to address the capital markets, financial services and healthcare. That said, the authorities have turned to all three of these issues in the last couple of years, and they currently all represent some of the best opportunities for investors.
Finally, in the "discretionary spending" category Russians unsurprisingly spend twice the average on spirits, but more surprising are the biggest spenders on holidays from all the emerging markets, bar Saudi Arabia.
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