There is indeed a shift occurring in many of these countries as they transition from production- and infrastructure-driven growth to personal-consumption driven growth. However, we believe anticipated deceleration in headline growth metrics will mask, for a time, the powerful growth engine of a rising consumer class—a longer-term secular trend likely to be largely unaltered by nearer-term volatility. As a result, we believe there remain interesting growth franchises among emerging market-domiciled Internet media and retail companies, which in some cases—due to a lack of traditional retail infrastructure—are innovating faster than developed world counterparts.
Looking beyond that space, we believe changing dynamics across the developing world create additional interesting opportunities for global investors. For example, over the past decade or so, faster growth rates combined with liberalizing economic policies have collided to pressure emerging market labor costs higher. Asian wages doubled between 2000 and 2011 with Chinese wages tripling; whereas wages globally grew about 23%, and developed-world wages grew just 5% And inflation continues—growing consumption-driven growth is still pressuring wages higher and, though decelerating, GDP rates in the region are still projected to double the developed world.
Exacerbating that wage inflation, labor supply in these regions has become constrained. Better diets and access to better medicine has increased longevity while, at the same time, birth rates have dropped, leading to aging populations with retirees not being replaced at a similar rate by newer workers.
Rising EM labor costs have implications for developed world purchasing power—the developed world has enjoyed lower-priced goods for the past two decades or so thanks to cheaper EM labor. Looking forward, manufacturers seeking to protect profit margins are unlikely to simply absorb higher labor costs. A secular trend that we view as still in early stages is the growing adoption of industrial automation.
Automation has several key benefits beyond just mitigating labor costs. Globally, consumers are demanding increased quality and safety. This is true in the developed world, and increasingly so in emerging markets as increased wealth correlates with demand for higher quality. Industrial automation can improve precision and raise safety profiles for a range of goods—from cars to pharmaceuticals to packaged foodstuffs.
