Chinese consumer a force to be reckoned with for global investor

We have seen an impressive rally in the stock market over the past couple of weeks that seems to have taken some people by surprise.

It has been fuelled by companies consistently outperforming analysts’ expectations, and also while the western world appears to still be in recession.

How come? Speaking to economists, when it became apparent that a recession was inevitable they were almost all of the opinion that a downturn in western consumption would have a huge impact on China as the main supplier of goods to the west.

The knock-on effect would be that China would not be able to grow at the rate it had been and demand for commodities would fall off a cliff.

As this became accepted wisdom we saw substantial falls in commodity prices, and it was one of the reasons the oil price fell as quickly and dramatically as it did.

Now, we have often commented on the need to think outside the consensus because it is more often than not wrong, and this is another classic example.

Much to most people’s surprise, China has helped to lead the recovery in global stock markets, not as a producer of cheap goods but as a consumer.

I say most people, because there is one shining exception and that is M&G’s star fund manager Graham French.

We have known Graham for several years, and he has always managed his fund, the Global Basics Fund, in the belief that the world was going to see a massive change in its make-up with the rapid rise of middle classes in both China and India.

Therefore, he believes that companies that can provide goods and services in these markets are likely to be the long-term winners.

The numbers involved are staggering. China has a population of 1.3billion and India 1.1billion. By way of comparison, America has a mere 300million citizens.

Now, at this stage I have to put my hands up and admit my ignorance.

When quoted these statistics years ago, my initial reaction was: “So what? They don’t have two brass farthings to rub together.”

How wrong was I?

Now there are more people using the internet in China than the total population of the US, and it is increasing at a rate of 8million a month. Also more than 95% of townships have access to broadband, and it is expected this will be 100% in the coming year. It puts Gordon Brown’s goal of networking Britain by 2012 in perspective.

The other fact I was completely unaware of was their desire to have western goods and lifestyles. This has led to a change in diet with a resultant increase in demand for western food such as McDonald’s and Kentucky Fried Chicken.

In 2000, sales in China did not even rate a mention in the annual report of Yum, owner of KFC and Pizza Hut.

Now it has more than 2,500 KFC and Pizza Hut outlets there, and soon this will be more than in the US. It eventually anticipates having 20,000 outlets in China.

Last month, Starbucks profits beat expectations fuelled in part by the continued demand for its coffee in China. It anticipates that China will soon become its largest market outside America, and one day demand there may even rival the US

In addition to fast food, the Chinese have also developed a taste for luxury items, and are now one of the most important markets for French wine exports, having grown from nothing in the past 10 years. This year, demand is expected to be 50% higher than last year, the only global market where French vineyards expect to see any growth.

None of this comes as any surprise to Mr French. By sticking to his convictions and beliefs, he has been able to deliver outstanding returns, and even taking into account the falls we saw last year, he has grown the fund by 91% in five years.

Steven Forbes is managing director of Alan Steel Asset Management, based at Linlithgow. He can be contacted on 01506 842365