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How China’s booming middle class is creating investment opportunities

Wages across Asia have been rising, and consumers are snapping up premium products and luxury brands – good news for savvy stock pickers.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Asia is now home to over half the world's population, and 21 of the world's 30 largest cities. Rapid urbanisation and wealth creation have made Asia the main growth engine of the world.

A new leader in consumption

Asia has relied on low-cost labour and cheap exports for many years. But it's gradually transitioning to an economic model focused on more sustainable growth, driven by domestic consumption. By 2040, the region's expected to contribute 40% of the world's consumption.

Embracing digital and mobile technology is helping to drive this change. Today 50% of global internet users are based in Asia and, in total, 1.9bn people are using mobiles to access the internet. This provides a portal for companies to advertise and sell their products and services, and for consumers to buy them at the touch of a button.

Made in China – no longer the world’s factory

China is key to this consumption trend. Now the world's second largest economy, China is home to 1.4bn people, who are growing in affluence and have big aspirations to earn and spend more.

In 2015, just 10% of China's population earned more than $10,000. But this is expected to rise to one third of the population within a decade. It means the middle class could make up one quarter of the global middle class population by 2030.

Technology is having a big impact on the way people spend their money. This is a global phenomenon but China stands out due to its scale and the speed of this shift, accelerated by the adoption of smartphones.

There are now more than 1bn mobile internet users in China and mobile payments have taken off swiftly. Total mobile payment transactions in China have increased from $25.8bn in 2015 to an estimated $292.7bn this year. And it's not only large bricks and mortar or online stores accepting this type of payment. Small retailers and even street vendors are also getting a piece of the action.

What consumers spend their money on is changing too. The first part of the consumer story saw people increase spending on everyday consumer staples, as well as electrical appliances like TVs and fridges, and cars.

Some parts of China, especially rural areas, are still in their infancy in these markets. But spending patterns in wealthier cities are moving from goods to services. More and more people are choosing to spend their money on experiences, such as eating out, travel, sport and education.

They also want to spend more on premium products and luxury brands. And trends are changing here too. Global brands have been favoured in the past, partly as people have tried to emulate the success of Western consumers. In some cities, local Chinese firms are now taking the lead, taking advantage of the fact they have a better understanding of local markets and can cater better to local tastes.

Overall, consumption can play a major factor in a country's success. A healthy level of consumer spending often indicates a higher level of confidence in the economy – it usually means wages are rising and could help boost the earnings of businesses whose products are in demand.

How can investors take advantage?

We think quality companies could benefit from rising wealth and consumption in China, and across Asia. A diversified fund could be a good place to start. Most Asian funds invest in China, alongside other countries such as India and Taiwan. Some have a bias towards consumer companies but invest in a spread of other sectors too, so your eggs aren’t all in one basket.

These funds invest in emerging countries, which are higher risk than developed markets. This means you should only invest if you have a long-term outlook and can accept the potential for greater levels of volatility. Like all investments, the value of these funds will rise and fall, so you could get back less than you put in.

We like the ASI Asia Pacific Equity Fund as a way to invest across the region. While it invests across Asia, around one quarter of the fund is currently invested in China. This includes Tencent, one of the country's biggest ecommerce firms, and a number of China A-shares. These are the shares of mainland China-based companies, which tend to be domestically focused. So the fund's managers think they're a great way to take advantage of growing consumption.

They also invest in a number of financial firms, including banks and insurers, and these make up 36% of the fund. Demand for their products could increase in line with rising incomes.

More on ASI Asia Pacific Equity Inc. Charges

ASI Asia Pacific Equity Key investor information

The Schroder Small Cap Discovery Fund is another way to access the consumer story. It currently invests 28% in consumer companies.

The fund's a little different to others that mainly invest in larger companies. It gives you access to some of the world's most innovative businesses, by focusing on smaller companies that are based in Asian and emerging markets, or make most of their money there. Smaller companies have lots of growth potential, but they're higher-risk so the potential for loss is greater.

More on Schroder Small Cap Discovery Inc. Charges

Schroder Small Cap Discovery Key investor information

This article isn’t personal advice. If you’re not sure an investment is right for you please seek advice.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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