Who is Muhammad Lee?
Saturna Capital
By John Scott
July 27, 2012
Saturna Capital’s core competency in investment management has always been our ability to identify long-term emerging trends and invest prudently in those themes to realize attractive returns for our shareholders. With this in mind, we viewed the recent welcoming of the seven billionth member to our global human family with intense curiosity.
Who is this Muhammad Lee? (So named, as these are the most common first and last names in the world.)1,2 Where is he from? How many brothers and sisters will Muhammad Lee have in the future? What are the implications of his arrival for U.S. investors?
Statistically, Muhammad Lee was probably born in Asia to an emerging middle-class family — about 55% of total births today are in Asia, according to U.S. Census Bureau data.3 His mother and father are the first generation of his family to be urbanites, in contrast to his rural ancestors who toiled as farmers. His family enjoys more economic and political freedom, and better education, than any past generation. In short, Muhammad has arrived at a fortuitous time and his future is bright! And yes, Muhammad is likely to be a boy as the CIA estimates the current worldwide sex ratio at birth to be 107 boys to 100 girls.4
Looking forward, the global population is forecast to hit 9.4 billion in 2050 (a compound annual growth rate of 0.8%).5 By that time Muhammad Lee may come from Africa as that continent’s proportion of total births will increase dramatically as Asia’s declines — although Asia will still account for the bulk of total births in 2050.
Birth locale, be it Africa, Asia, or Latin America, will not dramatically alter the investment opportunities represented by the Muhammad (and Meiling) Lees of the world as we believe many nations in Africa, Asia, and Latin America share similar characteristics: rapid urbanization, increasing globalization, an expanding middle class, etc.
With this in mind, we can track Muhammad Lee’s lifecycle and perhaps anticipate which companies will provide life’s necessities, as well as improvements in quality of life, to the Lee family. This will provide insights into how investors can capitalize on the growth of emerging market consumer economies.
Today, Mrs. Lee is increasingly relying on Enfamil (Mead Johnson, MJN US) and Similac (Abbott, ABT US) infant formulas for Muhammad when she is away at work. For those Mrs. Lees who stay at home, infant formulas are replacing breast milk and other traditional rice and grain-based porridges that were used to feed babies in previous generations. Muhammad will likely be weaned off infant formula when he is 12-months old and this will be replaced by children’s nutrition formulas such as Nurture (Heinz, HNZ US) and Gerber (Nestle, NSRGY US). He will also rely on snacks such as Danimals (Danone, DANOY US) to help build strong bones and muscles. Children’s nutrition formulas will be an integral part of his diet until he reaches the age of three.
From the age of three to preteen, Muhammad’s life will increasingly resemble that of a typical American or European adolescent. His favorite food might be McDonald’s (MCD US) cheeseburgers, washed down by Coca-Cola (KO US), and he will snack on chips made by Frito-Lay (PEP US) and confections made by Kraft (KFT US), which vastly increased its emerging markets exposure through its acquisition of the UK’s Cadbury in 2010. Both companies are tailoring their product lines to meet specific regional tastes. These global brands will compete with strong local and national brands to capture a larger portion of the Lee family’s weekly shopping budget. In China, these companies will face competition from the likes of Want Want (151 HK), in Indonesia from Unilever Indonesia (UNVR IJ) and Indofood (INDF IJ), and in Peru from Alicorp (ALICORI1 PE). Muhammad will spend hours connected to his friends playing Call of Duty (ATVI US) or FIFA World Cup (ERTS US) on his Xbox (MSFT US). Or, if he is in one of the online gaming meccas of South Korea and China, he may prefer online games provided by Shanda Games (GAME US), Tencent (700 HK), or Nexon (3659 JP). On those occasions when he ventures outside, he might wear Nike (NKE US) or Germany’s Puma (PUM GR) sneakers.
During his teenage years, he will stay in constant contact with his friends via Facebook (FB US), or Renren (RENN US) if he were Chinese, on his iPhone or iPad (AAPL US) — or on Samsung’s (005930 KS) Galaxy line of phones and tablets. He might meet his friends offline at Starbucks (SBUX US), KFC (YUM US), or Jollibee (JFC PM) in the Philippines. And to prepare for his post-high school studies, which will increasingly be in the West for his generation, he will likely attend after-school tutoring services to hone his English language skills. If he is in Mainland China, he may attend one of the services provided by New Oriental Education (EDU US).
Muhammad’s 20s will be his early golden years as he enjoys a secular shift in the global economic universe from West to East. He will enjoy the fruits of this shift — rising national GDPs, increasing disposable income and living standards — and his salary, on a global basis, will continue to rise due to strengthening national currencies. He might work for one of the global banks, such as Goldman Sachs (GS US), which has opened an office in his home country to bring local companies public; or perhaps Itau Unibanco (ITUB US) or Standard Chartered (STAN LN), both of which finance billions of dollars’ worth of international trade flowing through the region’s ports. Or, he might work for technology giants such as Taiwan Semiconductor (TSM US), IBM (IBM US), or SAP (SAP US), all of which have an extensive presence in Muhammad’s country to tap its engineering talent.
His quality of life, like his wage, is at a level his forefathers could have only dreamt about. He will match his favorite Polo Ralph Lauren shirt and jacket (RL US) with his Guess? Jeans (GES US) for his Friday night date with his girlfriend, who will be carrying a Hermes bag (RMS FP). He may pick her up in the latest model from Hyundai Motor (005380 KS) and drive to a movie theater showing a Hollywood blockbuster by Pixar (DIS US). He will search for the perfect ring for his future wife on China’s search giant Baidu (BIDU US) before deciding on one from Denmark’s Pandora (PNDORA DC)
In his 30s and 40s, the cycle should continue for his children. His kids will grow up on infant and children’s formulas made by Mead Johnson and Nestle. His family’s shelves will be stocked with likes of Colgate toothpaste (CL US), Gillette razors from Proctor & Gamble (PG US), and Persil detergent from Germany’s Henkel (HEN3 GR), while L’Oréal (LRLCY US) and Estée Lauder (EL US) will be his wife’s favorite cosmetic lines. When his kids are old enough they may travel to an exotic location, staying at one of French hotelier Accor’s (ACRFY US) multiple overseas properties. And the cycle continues…
By examining a portion of Muhammad’s life we can gain powerful insights into the level of penetration U.S. blue-chip companies and emerging overseas companies have on the daily lives of developing market consumers. Investors, though, do not have to wait years to capitalize on this growing trend since the events depicted above are already happening in places such as S. Korea, Thailand, South Africa, and Brazil.
We believe this is just the beginning. In coming years, the number of Muhammads going through the cycle will increase. According to the U.S. Census Bureau, over 110 million new births will take place in Asia, Africa, and Latin America annually until 2050 and most of these new citizens’ lifecycles will increasingly resemble that of Muhammad Lee’s. To put 110 million into perspective, today the U.S., Canada, the European Union, Japan, Australia, and New Zealand have a combined population of about 1,000 million, so emerging market economies will welcome more than 10% of the developed world’s population every year to their consumer classes!
What does all this mean for U.S. investors? First, there are tremendous growth opportunities in overseas markets, especially in developing and newly industrialized nations. Although we are not predicting the demise of the West’s economic power any time soon, as most North American and European citizens will continue to enjoy high living standards for years to come, we believe the income gap between citizens of the developed and developing worlds will narrow, and the convergence will take place through the Muhammad Lees of the world catching up to citizens from the West.
How do U.S. investors capitalize on the generational shift in living standards and consumption from the developed to the developing world? Through identifying the best mix of domestic/European multinationals with dynamic emerging market operations, as well as up and coming future world-class firms in the developing regions. U.S. blue chip companies, such as Mead Johnson and Colgate derive more than 50% of their revenue from emerging markets. Proctor & Gamble derives 35% of its revenue from emerging markets while paying a 3.8% dividend yield. Starbucks, McDonald’s, and Yum! Brand’s KFC franchises are among the largest and fastest growing restaurant franchises in China. Looking at overseas companies ten years ago, who would have considered buying a cell phone from Samsung, a vehicle from Hyundai Motor or a refrigerator from Haier (1169 HK)?
1 “The Most Common Surnames in the World” — The World Geography, February 10, 2012.
http://www.theworldgeography.com/2012/02/10-of-most-common-surnames-in-world.html
2 “Muhammad, prophet of Islam” — The Columbia Encyclopedia, Sixth Edition, 2001-07.
3 U.S. Census Bureau Data. http://www.census.gov/population/international/data/idb/region.php?N=%20Results%20&T=13&A=aggregate&RT=0&Y=2012&R=1&C=
4 The World Factbook 2009. Washington, DC: Central Intelligence Agency, 2009.
https://www.cia.gov/library/publications/the-world-factbook/index.html
5 “U.S. Projected to Remain World’s Third Most Populous Country Through 2050, Census Bureau Reports” — U.S. Census Bureau Release CB11-116, June 27, 2011.
http://www.census.gov/newsroom/releases/archives/international_population/cb11-116.html
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