It’s amazing so much investment commentary focuses on the next six to 12 months, when the booming Self-Managed Superannuation Fund market has a multi-year or decade view. Rather than obsess about which stock to buy, SMSFs should assess key long-term trends and asset allocation.
No trend will redefine the global economy – and influence investment markets – more in coming decades than the expected growth in middle-class consumers in stgeloping nations.
There will be 3.2 billion middle-class Asian consumers in 2030, from half a billion in 2009, according to forecasts cited in the Federal Government’s Australia in the Asian Century White Paper.
A 2010 OECD report, “The Emerging Middle Class in Developing Countries”, predicts the global number of middle-class consumers earning or spending US$10 to US$100 daily will soar from 1.84 billion in 2009 to 4.88 billion in 2030, with Asia accounting for most of that growth.
Put another way, there will be an extra 2.7 billion middle-class consumers on Australia’s doorstep within 17 years, with sufficient purchasing power to buy more goods and help economies such as China transition from investment-led powerhouses to engines of global consumption.
SMSF trustees, especially those in the accumulation or transition-to-retirement phases, should consider if their portfolio has sufficient exposure to the trend of a growing global middle class. Getting these big-picture, multi-decade trends right can make a huge difference: just ask investors who have bought healthcare stocks in the past decade in anticipation of an ageing population.
Spotting the trend is the easy part: choosing the right strategies and products to capitalise on it is harder. I prefer gaining exposure to emerging-market trends through stgeloped economies and multinational companies rather than investing directly.
This approach is consistent with broader themes this column favours. As readers will note, this column has been bullish on global equities in 2013, with a strong preference for stgeloped markets over emerging ones. The core idea has been to buy US equities as the US economy recovers.
The column also favoured buying Japanese equities on a significant pullback in the Nikkei 225 index (the correction in May and early June) and recently suggested the higher-risk idea of adding slightly more exposure to European equities in anticipation of a two-year recovery.
In parallel, was the suggestion to gain exposure to global equities in unhedged currency terms. It was a no-brainer to suggest the Australian dollar was badly overvalued above parity with the Greenback, and that the time to buy global equities was when our currency traded at near all-time highs.
The investment product of choice was the ASX-listed iShares Core S&P 500 exchange-traded product (ETP) for low-cost, diversified exposure to US equities. The ETP was up a whopping 29 per cent over six months to June 30, 2013, thanks to rising US equities and a falling Australian dollar boosting returns.
As discussed last week, US equities have good medium-term prospects, even after stellar gains this year. The housing recovery, rising property prices and eventually stronger consumption are tailwinds. Longer term, the boom in shale gas and a large, low-cost flexible labour market are game-changers.
The other reason I favour US equities is the exposure of the US multinationals in emerging markets. A growing proportion of earnings from the top 500 US companies by market capitalisation now comes from stgeloping markets that have more capacity to buy US products and services.
Global consumer-product gorillas such as The Coca-Cola Company, Nike, McDonald’s or Apple are superbly placed to capitalise on the boom in Asian middle-class consumers in coming decades.
SMSFs could buy the big US consumption stocks directly, choose a managed fund or an ETF that provides exposure to multinationals. The iShares Global 100 ETF, based on an index of 100 of the world’s largest transnational companies, is a good example. The SPDR S&P World ex-Australian Fund (unhedged) is also worth considering.
I still favour ETPs that are unhedged for currency exposure, given this column’s view that the Australian dollar will trade closer to US85c by year’s end. At those levels, it would make sense to choose a mix of hedged and unhedged ETPs (to reduce currency risk) or use a hedged version.
Gaining exposure to Asian middle-class consumption through multinational companies, mostly in stgeloped nations, has a better risk/reward equation than ETPs over Asian indices or a basket of emerging economies, or chasing commodities or resource stocks that benefit from Asian growth.
It’s also a simple idea for SMSFs that provides greater diversification by having exposure to a basket of global equities (compared with buying stocks directly) and can help lower overall portfolio costs. Clearly, there are worse trends to be exposed to than billions of middle-class consumers on Australia’s doorstep within two decades.
Tony Featherstone is a former managing editor of BRW and Shares magazines. All prices and analysis at Jul 17, 2013. The author implies no stock recommendations from the above commentary. Readers should do further research or talk to their financial adviser before acting on themes in this article.
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