Investors must recognise the importance of the middle class, says Delphi Funds’ Fjell

Øyvind Fjell, manager of Norwegian fund Delphi Norden, says that the continued development of a global middle class is crucial for future investment returns and a rebalancing of the global economy.

Over the next few decades, two billion people will leave a life of poverty and become members of the global middle class. That means the total buying power will also increase sharply in future.

At present, the world’s population is growing, but at a slower rate than before. Each year, the global population rises by 78 million, or around one per cent. The reason for this is primarily that we are living for longer and not that we are having more children than before. The birth rate, or number of children born per capita, is highest in the less developed countries while it has been falling for a long time in the western world. Japan is possibly the country where this trend has come furthest. A flattening out of the estimated life expectancy and a birth rate of only 1.37 children per woman mean that Japan’s population growth is currently negative.

Population growth versus productivity

The effect of population growth on the stock market seems at first to be quite obvious: everything else being equal, more people results in more busy hands and thus greater value creation in the economy. The problem with this is that higher value creation will only occur if new world citizens are quite highly productive. If they are, they will take an education and gradually become part of the workforce. With work comes pay, a prerequisite for private consumption. However, if the new world citizens are born into economies with very low productivity, the growth in population will in general not have any effect on the economy or stock market – as exemplified by Africa.

For the stock market, the global growth in the number of consumers is therefore far more important than the growth in the population itself. Since most people – you and I – are responsible for most of the consumption, the change in the size of the middle class is an important driver for the long-term consumption potential in the economy. An obvious conclusion is thus that the economy will be stimulated if that part of the population who live in poverty can be lifted out of this and into the middle class.

The new BRIC countries

Nowhere else has the growth in consumption been clearer than in the BRIC countries: Brazil, Russia, India and China. The rapid increase in the size of the middle classes has created sharp growth in demand here, across sectors and value chains, and contributed greatly to global growth during the past decade. China’s domestic consumption, for example, has grown by more than $1.5trn over the past ten years, an amount equal to approximately the size of the UK economy. As an investor, there is also reason to expect further growth. Another two billion people are expected to leave a life of poverty and enter the global middle class over the next 20 years. Countries such as Bangladesh, Egypt, Turkey and Nigeria will reflect the developments in the BRIC countries. This trend has just started.

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