Wednesday, December 2, 2020

Global Change

 

 

Ask The CFP® Practitioner
Darcie Guerin
darcie.guerin@raymondjames.com

“The only certainty about the future is the fact that it will be different than the past.” Sir John Templeton

Question: How do technological innovations impact the global middle class?

Answer: First, let’s define middle class. The term is somewhat subjective, so we’ll quantify it to describe people who fall in the middle section of income distribution within a given county. These consumers can consistently afford to spend money on additional items after meeting the basic needs of food, shelter, and clothing.

It’s true, a major shift is occurring in the world economy and economic growth of emerging nations is real. According to the Organization for Economic Cooperation and Development (OECD), the size of the global middle class is projected to increase from 1.8 billion (26% of the world population) in 2009 to 3.2 billion (42% of the total) 3.2 billion by 2020.

This is not a new theme. It was 1955 when Sir John Templeton made the above quote in reference to changing global demographics. What is new is how innovation enhances economic growth.

In the past, emerging markets grew based on exports of raw materials and finished goods to developed nations. Over time, technological advancements and the internet have helped to level the economic playing field, allowing the growing middle class to accumulate “excess” financial resources. These reserves are now available to purchase products and services not before consumed by this segment of the population. The increase in demand creates economic activity and new opportunities. Just like Economics 101, it’s all about supply and demand.

The economic significance lies in the sheer number of people who will have access to discretionary income. Growth prospects are available to companies headquartered within developing nations, and those US based multinational corporations who derive a significant share of their overall revenues from sales to consumers in developing nations.

The size of the middle class could more than double by 2030 to 4.9 billion people. That means almost 60% of the world’s population would be middle class, versus about 30% today. The fact that several billion people will be moving into this global middle class income bracket, bringing with them a desire to consume additional goods and services, is worth contemplating.

Not only will there be more of us, we are living longer too. Due to advancements in healthcare and nutrition, life expectancy has increased around the world. Pharmaceutical companies refer to this as “pharmerging” markets. The emerging market middle class represents numerous opportunities for these companies.

Meanwhile, as United States and European residents grow older, we’re spending more on drugs associated with ailments that accompany our later years. The longer we live, the greater demand we place on health care resources and products, which allows us to live longer, and the cycle continues.

Technology use also increases as disposable income rises for a growing worldwide middle class. The Institute for Security Studies (ISS), reports that while 30% of the world’s population has access to the Internet today, 99% will have access in 2030. Companies involved in cloud computing are taking note. Anyone who has seen the prices of personal computers and tablets fall over time realizes that there are opportunities when rapidly dropping prices meet rapidly increasing incomes.

Middle class consumers will consume a wide and ever-expanding range of products and services. This is how the cycle begins. Growth of a global middle class may warrant review of companies who could benefit from rising consumption in developing markets. Stay focused and invest accordingly.

This information is general in nature, it is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or solicitation to buy or sell any particular investment. Investing involves risk and the possible loss of principal invested. There is no guarantee any particular investment strategy will be successful. Opinions expressed herein are those of the author and subject to change at any time. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. There is no assurance the projections mentioned will be realized.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame design) in the U.S.”

 

Darcie Guerin, CFP®, is Associate Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email darcie.guerin@raymondjames.com. www.raymondjames.com/Darcie

 

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