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Investment Ideas Emerging-market millennials present new investment opportunities

Regina Chi is a vice-president and portfolio manager at AGF Investments Inc.

Their disposable incomes have been rising nearly as fast as the skyline in Shenzhen and health-food startups in Bangalore.

Millennials in emerging markets (EM) are driving consumption growth, not just in their own countries, but also around the world. Indeed, EM millennials – the demographic largely born in the 1980s and 1990s – are quickly becoming the world’s most powerful consumers, the Holy Grail for companies in the business of everything from cosmetics and luxury goods to food and appliances.

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And those businesses that successfully cater to this demographic stand to benefit from a long-term tailwind of growth, providing a wealth of potential opportunities for investors.

It’s little wonder. Consider these figures.

More than 80 per cent of the world’s millennials reside in EM. Meanwhile, Asia is home to a staggering 61 per cent of the global cohort, led by China and India, which each have five times the number of millennials as does the United States, according to figures from Merrill Lynch. Given their sheer numbers, we believe China and India are by far the most important millennial markets, although each market is unique.

And contrary to the well-documented litany of woes experienced by millennials in North America – unattainable housing, high student debt, stagnating wages and unemployment – EM millennials are extraordinarily optimistic, buoyed by rapidly rising wages, overall greater wealth, improving health trends and longer life expectancy.

Millennials in EM typically have different priorities and consumption preferences than their parents, who were largely concerned with boosting their basic living standards. With increased emphasis on experiences, recreation and wellness, millennials are spending more on travel, health, eating out, beauty products and clothing. They’re also more concerned with shelling out for perceived quality. Millennials in China, for example, are driving a significant rise in the affordable luxury segment, giving rise to a phenomenon known as “premiumization,” whether it’s a growing taste for macarons and Cognac, or Chanel jackets and Gucci handbags.

Meanwhile, in India, regional differences in cultures, lifestyles and preferences have given rise to a more varied market. However, millennial consumers across regions are especially concerned with health and wellness, with 36 per cent having a fitness app installed on their phones and 45 per cent concerned with living a healthy lifestyle, according to a recent report by Deloitte titled Unravelling the Indian Consumer. That translates into everything from healthy foods – such as kale chips and activated-charcoal drinks – to demand for personal care items with an emphasis on Ayurvedic principles.

Technology is driving both retail and consumption trends. Many EM millennials have leapfrogged the typical transition from laptop to tablets, heading straight to smartphones. According to the Financial Times, some 70 per cent of online purchases in China are conducted on a mobile phone, double the percentage in the United States. EM millennials also prefer digital wallets and peer-to-peer payments over credit cards – a marked difference from the experience in the West, where the presence of credit cards is still ubiquitous.

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Investment opportunities

These shifts in EM millennial attitudes and consumer behaviours are providing new opportunities for investors.

While many in the West may be familiar with Alibaba Group Holding Ltd., few may be aware of the staggering size of its platform with 636 million annual active consumers, according to company figures. Not only does Alibaba operate the largest e-commerce platform in China, it is an ecosystem bringing together logistics, marketing, technology, cloud computing and entertainment. It accounts for 70 per cent of all domestic retail e-commerce transactions and 50 per cent of online wholesale transactions, Alibaba figures show. Perhaps, just as important: Alibaba’s platform has yet to reach full market penetration.

Meanwhile, Ctrip.com International Ltd. is cashing in on the growing travel trend among Chinese millennials. Ctrip is China’s largest provider of hotel and other accommodation reservations, transportation ticketing, package tours and corporate travel services. All told, it provides access to 500,000 hotels domestically and 750,000 hotels abroad. The company is likely to benefit from growth in the travel sector and we believe Ctrip’s scale and product suite will likely position the company to continue gaining share of China’s largely unpenetrated travel market, particularly as it leverages the shift to online and mobile markets.

For investors, the EM millennial boom is likely to provide untold opportunities in diverse sectors. Innovative local companies are already benefiting from this shift, leveraging knowledge of local tastes and demands. Meanwhile, aspirational brands and luxury retailers around the world are also cashing in. Investors would be wise to take a long-term view as this demographic trend continues to unfold.

The views expressed are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. References to specific securities should not be considered as investment advice or recommendations. AGF owns all stocks mentioned in this article.

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