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The rise of the newly-affluent millennial generation is disrupting traditional industries in emerging markets – and bringing new risks and opportunities for investors.
Despite all the column inches devoted to the so-called millennial generation in recent times, very little attention has been given to one of the more intriguing developments: the contrasting fortunes of millennials in advanced economies and the emerging markets.
While millennials in advanced economies have come under pressure in recent years due to stagnating wages, rising house prices and escalating student debt, an altogether different trend is taking in place in many emerging markets, where millennials are seeing their prospects rapidly improve. This is especially noticeable in India and fast-growing Southeast Asian countries such as Indonesia, which boast large cohorts of young people. This has the potential to be a major investment theme in the coming years.
Taking advantage of the resulting opportunities, however, requires knowledge of the specifics of each country’s demographic make-up and consumer preferences, says Will Ballard, head of emerging-market equities at Aviva Investors in London. He points to the influence of millennial trends in India, where the average age is about 29.
“As in many emerging markets, public transport in India is quite poor, and as the population grows more affluent there has been a rise in the number of private vehicles, especially two-wheelers,” says Ballard. “In urban areas – and in wealthier parts of rural India – there has been a demand for vehicles that stand out from the crowd and manufacturers are keen to capitalise on this trend.”
Ballard cites the example of automaker Eicher Motors, which acquired the British Royal Enfield motorcycle brand as a signifier of quality and style. The company has seen strong demand from young consumers eager to differentiate themselves amid the flocks of identikit mopeds on Indian roads.
The smartphone generation
Coined by the demographers William Strauss and Neil Howe, the term ‘millennial’ usually refers to a young generation born between 1981 and 2000. Like their counterparts in developed markets, emerging-market millennials use smartphones intensively, often favouring local models, or those imported from other EM countries, over Western brands. Chinese-made smartphones from Huawei, Xiaomi and Lenovo are seeing fast-rising sales in the Indian market.
New telecommunications operators have emerged to offer mobile data packages to this demographic, disrupting incumbents that tend to offer patchy service. “We have seen the rise of companies such as Mumbai-based Reliance Jio, which offers data at an incredibly low cost to win millennial customers,” says Ballard.
“Time will tell whether it is successful over the long term – telecoms is a competitive industry – but what’s clear is that telecoms operators that don’t cater to the needs of the younger generation are going to fall behind. We are seeing that across emerging markets.”
As in the West, increased smartphone penetration is enabling the millennial generation to survey peer reviews and compare options. This has implications for education and healthcare as well as consumer products. A relatively wealthy millennial in India will be aware local healthcare provision is poor compared with global standards, so may opt to travel abroad to a high-quality private hospital chain, such as Bumrungrad in Thailand, where medical tourism is a booming industry. “Cross-border services are growing in popularity across emerging markets, which is an interesting trend,” says Ballard.
The picture for the younger generation elsewhere in the emerging markets is more mixed. Take China, for example, where millennials face similar economic challenges to their counterparts in the West. As products of the One Child Policy (1979-2015), which skewed demographics, they will need to support a much bigger cohort of older retirees. Property in ‘Tier One’ cities such as Beijing, Shanghai and Guangzhou is becoming just as expensive as in New York and London.
Nevertheless, Chinese millennials are a hugely influential group of consumers: they number 415 million, more than the entire working populations of the US and Western Europe combined. Over the next 10 years their aggregate income could rise by $3 trillion, according to Credit Suisse. And they are feeding the growth of new corporate giants, the so-called BATs (Baidu, Alibaba, Tencent), which offer cutting-edge internet platforms and smartphone apps.
“Alibaba is one of the biggest companies in the world, thanks to growing demand for e-commerce,” says Xiaoyu Liu, fund manager, emerging-market equities at Aviva Investors. “Gaming is driven by the younger generation; that’s benefiting companies like Tencent and NetEase. And Tencent’s WeChat app has 800 million users. The whole population is using it, but millennials are more intensive users compared with their parents.”
WeChat offers a seamless online-to-offline experience, satisfying millennials’ demand for convenience. Users can communicate with friends and family through calls and video-chats, book taxis and overseas holidays, make restaurant reservations, play games, pay bills and purchase items at physical shops – all without ever leaving the app.
Politics and the police state
By collecting data on the huge cohort of Chinese millennials – who are on the whole more relaxed about data protection and privacy than their Western counterparts – these technology companies are developing new innovations in artificial intelligence, as well as fintech platforms such as peer-to-peer lending.
But this wealth of data is also accessible to the government, and is facilitating an Orwellian system of state control. A ‘social credit’ system is in the works: a massive surveillance apparatus designed to keep track of citizens using facial recognition and data about online behaviour collected by technology providers. The government already has thousands-strong teams monitoring and censoring social-media posts.
Chinese millennials are far from the passive victims of government control, however; in fact they are increasingly shaping the political debate in the country, according to Ballard. “Younger generations in China value quality of life, not just ever rising GDP, and the 19th Party Congress showed the government recognises that.
“Beijing residents are unhappy with air pollution, for example. In response, the government has reduced the amount of coal being burned, and there has been consolidation in the steel industry to remove low- quality, high-producing capacity. It shows the rise of millennials can shape government policy, even in what is a one-party state,” Ballard adds.
Impetus for reform
Millennials are having an even more dramatic impact on politics in other countries. A big cohort of young voters pushing for change has contributed to reform efforts in several emerging markets, bringing advantages for foreign investors.
Huge street protests, orchestrated by young people on social media, were a big factor behind the demise of President Dilma Rousseff in Brazil, who was eventually impeached in August 2016 following a corruption scandal. The ousting of Rousseff led to hopes of economic and political reform and the MSCI Brazil Index rose a remarkable 66.2 per cent in 2016, compared with only an 11 per cent rise in the wider MSCI Emerging Markets Index.
Or consider Indonesia, where the median age is under 30. One third of voters in the 2014 presidential election were casting their ballot for the first time, hungry for reform. This cohort of younger citizens helped elect Joko Widodo, a candidate who pledged to challenge corruption, liberalise the Indonesian economy and end trade protectionism (although his programme has had mixed results so far).
The young, growing populations of sub-Saharan Africa could in time deliver similar political and economic benefits, although recent developments in the Middle East suggest vast numbers of working-age citizens may be a mixed blessing for economies that cannot accommodate them with jobs.
“Countries such as Saudi Arabia could face problems if they cannot put the younger generation to work. The Arab Spring was driven by large numbers of young people who were faced with a lack of opportunities,” says Aaron Grehan, senior portfolio manager in Aviva Investors’ emerging market debt team. “But if everything else is aligned, younger demographics can be a massive driver of economic growth and development.”
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