The Changing Face of the Global Consumer the Changing Face of the Global Consumer

The Long View Investment Insights

2016 Edition, Issue 2

The Changing Face of the Global Consumer The Changing Face of the Global Consumer

“The demographic changes and the Consumer spending, long a driver of the global economy, is undergoing sweeping change. growth we’re seeing in China, India Whether it’s housing for millennials or health care for baby boomers, a significant shift in the way and other parts of the developing world are having a profound effect people spend money is underway in both advanced economies and the developing world. on the global economy, and they One thing about spending money hasn’t boomers. They’re obviously moving into spending, boomers will also be spending also have significant implications for changed. Americans do a lot of it. Last retirement. Health care is one of the big on travel, leisure and financial services. companies in the U.S. and other parts year Americans spent more than US$11 aspects of that,” Rob says. “At the other “The demographic changes and the growth of the developed world.” trillion, accounting for two-thirds of the end are millennials, one of the largest we’re seeing in China, India and other nation’s gross domestic product. But the generations and one that’s grown up with Jody Jonsson, Portfolio Manager parts of the developing world are having way Americans spend money is changing. the internet and technology.“ a profound effect on the global economy, Since 2000, there has been a rotation in Millennials were born from 1980 to 2000. and they also have significant implications spending away from goods and towards There are about 80 million in the U.S., but for companies in the U.S. and other parts services, especially travel and leisure. most of the world’s 2 billion millennials are of the developed world,” says portfolio That dynamic may also be at work in China, living in emerging markets. In Brazil, India manager Jody Jonsson. as the country continues on the path and China they outnumber baby boomers. to having the world’s largest consumer Globally, millennials are estimated to have economy. Consumers there are starting a combined spending power of nearly to spend less money on necessities and US$2.5 trillion. They are about to reach Key Takeaways more money on activities such as family their prime working and spending years, We live in a transformational time trips and going to the movies. and their impact on the world’s economy •• A significant shift in consumer spend- “What we are seeing is that the Chinese could be huge. ing may be underway across the are primarily spending their money online, “During the next 10 years, developing world. on lifestyle and on experiences,” Capital countries are expected to add about a bil- •• From baby boomers to millennials, Group’s China affairs specialist, Andrew lion people to the middle class and above,” a new breed of consumers is set to Dougherty, says. “From an investment says portfolio manager Noriko Chen. transform spending habits. standpoint, these are secular opportuni- “These emerging economies will account ties worth paying attention to. China is the •• Companies that can take advantage for nearly half of total global consumption. largest e-commerce market in the world of this transition have the potential I believe that is going to have a transfor- and is still growing by double digits.” to reap new profits, and reward mational impact on the world’s economy.” investors. Capital Group Canadian Focused Equity At the other end of the spectrum, many FundSM (Canada) portfolio manager Rob baby boomers globally may be done Lovelace says two demographic groups working, but they’re not done spending. will have a major impact on the future of While that means increased health care the global economy. “The first one is baby Cover: From millennials to baby boomers, the face of the global consumer is changing. Big Spenders: Consumers Play a US$43 Trillion Role in Global Economy India and China Are Joining the U.S. as Major Drivers of Economic Growth

$25 Private consumption (trillion U.S. dollars) “The increasing affluence and the emergence of consumer classes in Private Consumption as a Percent of developing countries is a durable Gross Domestic Product (%) 20 UNITED STATES trend that should continue for 2015 2045 many decades to come. It’s a 68 67 65 trend that has the potential to 59 57 55 15 be one of the primary engines 47 of economic growth.” 39 CHINA Rob Lovelace, Portfolio Manager, Capital Group Canadian Focused Equity 10 FundSM (Canada) United States China India Canada

INDIA

5 MEXICO UNITED KINGDOM GERMANY BRAZIL CANADA 0 RUSSIA 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045

Source: Thomson Reuters Datastream. Please •• In less than a decade, something will economic expansion. The gross do- •• An April 2016 report from the McKinsey see back cover for additional information. happen for the first time in history. By mestic product (GDP) in the U.S., for Global Institute found that although 2025, 4.2 billion people will be part of example, is nearly US$18 trillion. About demand for goods is still growing at a the consuming class. That means the two-thirds of that comes from con- respectable rate in many economies, number of people with discretionary sumer spending on goods and services, consumption is shifting toward services. income will exceed the number still including cars and furniture, food and In short, as per capita incomes rise, less struggling to meet basic needs — a beverages, and health care and hous- money is spent on necessities such as phenomenon that may well be the ing. Global GDP is about US$75 trillion, groceries, and more money is spent on biggest opportunity in the history of and consumers account for about 57% services like restaurants, hotels, recre- capitalism. This improvement in the stan- of that amount, or about US$43 trillion. ation and cultural activities. This evolu- dard of living represents a remarkable Consumer spending represents a major- tion is well underway in developing transformation for the global economy ity of spending in all advanced nations, countries around the world as millions and companies around the world. and the way people spend money is un- move into the middle and upper-middle dergoing a major shift in many countries. classes. •• Consumer spending has long been a significant element of the world’s The Long View | 1 In China, Spending Is a Family Affair Chinese Consumers Are Expected to Spend US$3.6 Trillion This Year

Box Ofﬁce Revenue in China International Tourism Expenditure of Chinese Tourists (billion U.S. dollars) (billion U.S. dollars) “China’s service sector has surpassed the manufacturing and agricultural Top 10 Highest Grossing Movies in Companies Riding on $292 sectors as the leading sector in the China in 2015 (millions U.S. dollars) Chinese Travel economy and now represents 1 Furious 7 $391 Chinese Eastern Airlines 2 Monster Hunt 382 Ctrip more than half of China’s GDP. 3 Mojin: The Lost Legend 256 $6.8 So, that’s a good indicator that the 4 Lost in Hong Kong 254 InterContinental Hotels $235 economy is rebalancing away from 5 Avengers: Age of Ultron 240 Royal Caribbean Cruises 6 Jurassic World 229 Six Flags Entertainment manufacturing and investment and 7 Goodbye Mr. Loser 226 toward services and consumption.” 8 Jian Bing Man 186 9 The Man from Macau II 154 $4.6 Andrew Dougherty, Capital Group China 10 Monkey King: Hero Is Back 153 Affairs Specialist $129 $3.4 $102 $2.6 $2.0 $73 $1.6 $55

2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015

Sources: (China) State Administration of •• Never underestimate the power of the •• Going to the movies and taking •• China’s box office revenue is projected Radio, Film and Television, Statista Inc. and Chinese consumer. Complex and family trips abroad have become part to reach US$8.4 billion in 2016, and Xinhua News Agency (box office revenue); massive, volatile and unpredictable, the of Chinese life. More than 70 million grow to US$15 billion in 2020. What Box Office Mojo at www.boxofficemojo.com (top 10 movies); and Statista Inc. and United 1 billion consumers in China are not Chinese tourists spent US$292 billion on Hollywood movie has made the most Nations World Tourism Organization (inter- exactly clinging to their yuan. Despite a outbound travel in 2015, or nearly three money in China? Furious 7 took in national tourism expenditure). Please see relatively sluggish economy, the Chinese times the level in 2012. Many of those US$391 million at the box office last back cover for additional information. are projected to spend US$3.6 trillion trips are booked through Ctrip, an online year. For many, spending is about going this year, or double what they spent in travel firm partly owned by Priceline and places with the family, a dynamic that’s 2006. They are also expected to increase Baidu, the Chinese internet search giant. benefiting Disney, which opened a their spending by 10% a year through The surge in Chinese outbound travel is US$5.5 billion theme park in Shanghai in the end of the decade. They are not a multidecade theme driving structural June — the company’s biggest invest- just filling the basket with consumer growth in the airline, gaming and inter- ment outside Florida. By August, the staples — for some, shopping is about net industries. theme park had already welcomed its the experience. millionth visitor.

2 | The Long View India Emerges as a Massive Market The Country May Still Be on the Ground Level as a Consumer Society

“India has a lot going for it in terms Households That Own Durable Goods (%), as of 2015 of favourable demographics, the possibility of a downward trend in 40 67 77 90 inflation and a substantial reform 13 9 25 67 agenda. If reforms are forthcoming, its economy could really take off, GLOBAL AVERAGE similar to the way China’s did.” INDIA Nick Grace, Portfolio Manager

AIR CONDITIONER WASHING MACHINE REFRIGERATOR TELEVISION

Key Players in the Consumer Appliance and Electronics Market BOSCH LG SAMSUNG SONY WHIRLPOOL

Source: Euromonitor International. Data are •• India embarked on a journey about 25 •• When it comes to being an economic •• India also stands to benefit from a de- based on possession rate, which is a measure years ago, opening its doors to global- powerhouse, India may just be get- mographic tailwind during the coming of how many of the population units used ization and world markets. Since then, ting started. The chart shows that the decades. India has about 440 million (e.g., households) own at least one unit of a certain product, as defined by Euromonitor. the country has become one of the most country still lags much of the world in millennials and 390 million members of important components of the global having items such as refrigerators and air Gen Z (born after 2000) that make up its economy. India’s growth has overtaken conditioners. But modernization is pro- 1.3 billion population. Over the next de- that of fellow Asian giant China. One gressing at a relatively rapid rate, both cade, about 150 million new people will of the key components of the country’s in terms of personal consumption and enter India’s workforce. That’s about the economic growth is brisk consumer modernizing infrastructure. Under Prime present size of the entire U.S. workforce. spending, which propelled growth in Minister Narendra Modi, highways, air- A swelling workforce makes it likely India India’s economy to 7.6% as of the end of ports and railways are being improved, will continue to be a massive market the country’s 2015 fiscal year — the fast- which could provide opportunities for for consumer companies and a major est pace in at least four years. companies and boost the economy. economic force.

The Long View | 3 Millennials: Aren’t They About Ready to Start Buying ... Everything? Collaborative and Disruptive, Millennials Are Beginning to Flex Their Financial Muscles

“Millennials still consider home Annual Expenditure of Biggest Global Cohort Potential Beneﬁciaries in the ownership important. I think they U.S. Millennials of Collaborative Consumers Sharing Economy Ecosystem will become more active buyers of (U.S. dollars) traditional single family houses after they resolve financial constraints.” 7% GENERATION Z Alex Sheynkman, Investment Analyst ROOM-SHARING Airbnb $1.4 FlipKey HomeAway TRILLION 35% MILLENNIALS

ASSET-SHARING RIDE-SHARING Indiegogo Curb Kickstarter Lyft Lending Club Uber $600 17% GENERATION X BILLION PROPERTY-SHARING Desktime 7% BABY BOOMERS Regus 2013 2020 WeWork 1% SILENT GENERATION

Sources: Statista Inc. (annual expenditure of •• Talk about pent-up demand. Millenni- •• Millennials are also taking a collaborative •• While millennials are already a potent U.S. millennials) and The Sharing Economy, als have been battered by the Great and disruptive approach to consump- force, they will truly come into their Credit Suisse, September 18, 2015 (percent Recession, swamped with student debt tion. Technology has made sharing as- own by 2020, when their spending in of collaborative consumers). The figure for annual expenditure of U.S. millennials for 2013 and stuck in their parents’ basements for sets relatively inexpensive and possible the United States is expected to reach is an estimate, and for 2020, it is a forecast. years. They’ve put off getting married, on a large scale. In the sharing economy, US$1.4 trillion annually. Some of that The percent of collaborative consumers by having kids and buying a car, much less people rent rooms, cars or luxury purses money may go to purchases that have generational cohort is based on a 2014 survey a house. But those days may be coming directly from each other via the internet. been put off in the wake of the Great conducted by The Nielsen Company and Credit to an end. In fact, the members of the Some companies facilitating this collab- Recession. As millennials enter their Suisse research. biggest generation in U.S. history may orative consumption now have multibil- peak home-buying years, for example, be about ready to flex their financial lion market caps, including Airbnb, Uber their reluctance to enter the housing muscles. There are about 80 million and HomeAway. By 2025, according to market could change. The cohort’s size, millennials in the U.S. alone, and consulting firm PricewaterhouseCoo- plus its desire to settle down in the they are already spending at least pers, the sharing economy may account future, could lead to a surge in house- US$600 billion a year. for US$335 billion in global spending. hold formations and home sales.

4 | The Long View 1.3 Billion Shades of Gray Silver Will Be the New Black as Populations Age

“In coming decades, many forces As Populations Age, Health Care Spending Is Expected to Soar will shape our economy and our society, but in all likelihood no single factor will have as pervasive an effect as the aging $114.8B $85.0B $573.9B $230.4B $80.0B $310.5B $111.1B $1.3T of our population.” Ben Bernanke, former Chairman, $91.4B $122.6B $43.3B U.S. Federal Reserve $29.6B $434.4B $14.4B $53.4B $5.1B 15.2 38.4 5.6 10.8 127.2 316.7 16.9 23.2 67.9 159.0 33.1 38.7 11.0 17.5 46.2 79.7 $947 $2,989 $5,292 $7,868 $420 $1,812 $5,411 $9,933 $75 $503 $3,703 $8,022 $3,935 $6,348 $9,403 $16,592

BRAZIL CANADA CHINA GERMANY INDIA JAPAN UNITED UNITED KINGDOM STATES

2014 2040 Total health spending for population 65 and older (U.S. dollars) 2014 2040 Population 65 and older (millions) 2014 2040 Total health spending per capita (U.S. dollars)

Sources: OECD (population 65 and older); •• A striking demographic change is taking end of this decade, up from US$8 trillion •• Companies that already sell primarily The World Bank (health spending for 2014); place worldwide, as people live longer in 2010, according to Euromonitor, a to older consumers, such as health care and “National Spending on Health by Source than ever before and fertility rates fall global research firm. and medical device manufacturers, for 184 Countries Between 2013 and 2040,” in many regions. Globally, the number see a potential bonanza coming. One The Lancet, Dr. Joseph L. Dieleman et al., •• Health care and pharmaceuticals, leisure of those aged 65 and over is growing example is Smith & Nephew, which sells June 18, 2016 (health spending for 2040). and tourism and financial services are Please see back cover for additional information. at around twice the rate of the overall replacement hip and knee joints, largely seen as some of the key sectors likely to population. By 2040, the global popula- to an older population, and lists aging benefit. They will not be alone: consum- tion of people aged 65 and older will populations as one of its key drivers er goods, food and beverages, retail and double to almost 1.3 billion. The implica- of growth. This age cohort is now the technology companies are also expect- tions of a demographic shift of such fastest growing primary segment of the ed to find new opportunities. For some magnitude are far reaching. Globally, the world’s population and its growth rate specialized companies, longevity already spending power of consumers age 60 is outstripped only by that of an older offers significant growth opportunities. and older will hit US$15 trillion by the subgroup — those aged 80 and above.

The Long View | 5 Investment Professional Biographies

Joanna (Jody) F. Jonsson is an equity portfolio manager at Capital Group. Noriko Honda Chen is an equity portfolio manager at Capital Group. She She has 27 years of investment experience and has been with Capital also serves on the Capital Group Companies Management Committee. Group for 25 years. Earlier in her career, as an equity investment analyst She has 25 years of investment experience and has been with Capital at Capital, Jody covered insurance, U.S. household & personal care, Group for 17 years. Earlier in her career, as an equity investment analyst restaurants & lodging and cruise lines companies. Before joining Capital, at Capital, Noriko covered Asian infrastructure, building materials and she was an equity research analyst at Fidelity Management & Research Company in construction companies, as well as oil, gas & refining companies. She was also a Boston and an officer in the public finance division of Irving Trust Company in New research director for one of the global groups. Before joining Capital, she worked in York. Jody holds an MBA from Stanford Graduate School of Business, where she was an the research department of Worldsec International Limited in Hong Kong (a subsidiary Arjay Miller Scholar, and a bachelor’s degree in economics from Princeton University of Mitsubishi Bank) and was a manager in corporate finance. Noriko holds a bachelor’s graduating cum laude. She holds the Chartered Financial Analyst® designation and is a degree in economics from Williams College and a degree in the Japanese Language member of the CFA Institute. Jody is based in Los Angeles. Bekka Program at Keio University, Tokyo. Noriko is based in San Francisco.

Andrew H. Dougherty is a China affairs specialist at Capital Group. Nicholas J. Grace is an equity portfolio manager at Capital Group. He has He has 11 years of investment industry experience, all with Capital Group. 26 years of investment experience and has been with Capital Group for Andrew began his career at Capital as a participant in The Associates 22 years. Earlier in his career, as an equity investment analyst at Capital, Program, a two-year series of work assignments in various areas of he covered global mining companies. Prior to joining Capital, he was the organization. He holds a master of philosophy in modern Chinese manager of metals research for J.P. Morgan Investment Management studies from the University of Cambridge and a bachelor’s degree in economics and in Australia. Nick holds an MBA from the University of Wisconsin-Madison, and a international affairs from George Washington University. Andrew is based in Beijing. bachelor’s degree in finance and economics from the University of Waikato, New Zealand, graduating with honors. He also holds the Chartered Financial Analyst® Robert W. Lovelace is an equity portfolio manager at Capital Group and designation. Nick is based in London. is one of the portfolio managers of Capital Group Canadian Focused Equity Fund (Canada). He also serves on the Capital Group Companies Alex Sheynkman is an equity investment analyst at Capital Group with Management Committee. Rob has 30 years of investment experience, all research responsibility for U.S. PC/enterprise hardware manufacturers, with Capital Group. Earlier in his career, Rob was an equity investment photographic products, office electronics imaging equipment, REITS and analyst at Capital covering global mining & metals companies and companies homebuilding companies. He has 18 years of investment experience domiciled in Mexico and the Philippines. He holds a bachelor’s degree in mineral and has been with Capital Group for 15 years. Prior to joining Capital, economics (geology) from Princeton University graduating summa cum laude and Phi Alex was a research analyst with Merrill Lynch and a research associate with Sanford Beta Kappa. He also holds the Chartered Financial Analyst® designation. Rob is based in Bernstein. Before that, he was a consultant with Bankers Trust. He holds an MBA from Los Angeles. New York University’s Stern School of Business and a bachelor’s degree from Moscow Telecommunication Academia. Alex is based in Washington, D.C.

6 | The Long View The following information pertains to the August 2016. The figure for international Health Expenditure database. Data, which Evaluation’s Financing Global Health 2015 charts on the pages specified below. tourism expenditure for 2015 is a forecast. represent the sum of public and private health report. Data were converted to a common Page 1: Private consumption represents the Page 5: Data for population 65 and older for expenditures as a ratio of total population, are purchasing power-adjusted and inflation- volume of goods and services consumed by 2014 and 2040 are from the Organisation for in current U.S. dollars. Health spending per adjusted currency. A series of ensemble households and nonprofit institutions serving Economic Co-operation and Development capita projections for 2040 are from Joseph L. models and observed empirical norms were households. Data, based on 2010 constant (OECD); United Nations World Population Dieleman, PhD, Tara Templin, BA, Nafis Sadat, used to estimate future government out-of- prices not seasonally adjusted, from 2016 and Prospects, The 2010 Revision (Brazil, China MA, Patrick Reidy, BA, Abigail Chapin, BA, pocket private prepaid health spending and forward are forecasts for all countries shown; and India); Destatis (Germany); National Kyle Foreman, PhD, Annie Haakenstad, MA, development assistance for health. Each for China, forecasts are from 2015. Values for Institute of Population and Social Security Tim Evans, MD, Christopher J. L. Murray, MD, country’s estimates were aggregated to consumption as a percent of gross domestic Research (Japan); Office for National Statistics and Christoph Kurowski, MD, as published generate total health spending from 2013 to product (GDP) are expressed as a share of (United Kingdom); and U.S. Census Bureau in “National Spending on Health by Source 2040. These estimates were compared with nominal GDP. (United States). Historical population data for 184 Countries Between 2013 and 2040,” each other and internationally recognized and projections (1950-2050) were accessed The Lancet, Volume 387, Issue 10037, Pages benchmarks. Data for total health spending for Page 2: The figures for box office revenue were 2521-2532, June 18, 2016, http://dx.doi. population 65 and older were not plotted on converted from Chinese yuan into U.S. dollars via OECD’s Demography and Population database at https://stats.oecd.org on August org/10.1016/S0140-6736(16)30167-2. the same scale for the countries shown. using one exchange rate as of December 31, Data were extracted from the World Health 2015; these figures, therefore, are estimates. 29, 2016. Data for health spending for 2014 are from The World Bank, World Development Organization’s Health Spending Observatory The top 10 highest grossing movies for 2015 and the Institute for Health Metrics and are based on box office results updated in Indicators, World Health Organization Global

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