Food and electricity bills are high. The cost of filling up at the petrol station isn’t coming down much either. The U.S. economy is in trouble and suddenly the job isn’t as secure as it seemed. Maybe that designer handbag and new car aren’t such good ideas after all.
That’s the kind of decision millions of middle class consumers in developing countries are facing these days. That’s bad news for purveyors of everything from jeans to iphones who have enjoyed double-digit profits thanks to booming sales in emerging markets.
Brazil is the best example of how emerging market consumers are tightening their belts. Thanks to their spending splurge earlier this decade, Brazilian consumers on average see a quarter of their income disappear these days on debt repayments. People’s credit card bills can carry interest rates of up to 45 percent. The central bank is so worried about the growth outlook it stunned markets with a cut in interest rates this week even though inflation is running well above target
All that bodes ill for shares in companies selling so-called consumer discretionaries in developing countries – non-essential items such as autos and high-end cosmetics.
But someone’s loss is someone’s gain. Shares in companies selling consumer staples –food, beverages, prescription meds and tobacco — are starting to pick up. In short, everything that outperforms during economic downturns. MSCI’s index of emerging market staples is flat on the year, doing only slighly better than consumer discretionaries. But guess what? In August, when everything was selling off staples did ok. They fell 2.4 percent, much better than MSCI’s discretionaries index which lost 8 percent.