Prudential Sharpens Focus on Asian Growth Potential

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PRU: Prudential Financial logo
PRU
Prudential Financial

Growth in China and India has become an economic cliché, but the value of these markets should not be ignored by savvy investors. Prudential Financial (NYSE:PRU) has wisely followed the growth in these two nations and other emergent markets by leveraging its American-built brand and expertise to offer investment and insurance solutions to growing emergent markets. This growth is set to accelerate in the coming decade, making Prudential a wise bet for a globally minded investor looking for conservative but solid growth in the financial services sector. Prudential does face growing competition in these emerging economies from insurers such as Manulife (NYSE:MFC).

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An Emerging Middle Class

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Almost unstoppable growth in China and India has produced an emergent middle class whose numbers have grown exponentially in the past ten years. Despite the new middle classes of these countries, domestic consumption has lagged far behind developed economies, especially America. Even fully developed Japan never saw domestic consumption rise to western European and American levels, as government policies, deflation, and economic stagnation encouraged savings and maintained the nation’s export-driven growth model, even after it failed to produce growth.

World map showing countries by nominal GDP per...

While there are modest signs that China may face a Japanese-style deflationary period after its housing bubble pops, there are also signs that the new Chinese middle class will continue to consume at higher and higher levels. It is important to remember that China’s GDP per capita is $4,393, about ten times less than America’s or Japan’s, and China’s wealth is more concentrated into a small group of elites than almost any other country on earth. There is much room for middle class incomes to grow, and for these new middle class wage earners to spend their money on middle class products, like insurance.

India has even further room to grow, with a GDP per capita of $1,477 and a population slightly over 1 billion people. With GDP growing steadily at around 9% in the past decade (excluding three post-recession quarters of around 6% growth), the country has proven itself to be an engine for growth. With political and economic power less concentrated than in China, there are reasons to expect greater income gains in the country’s large middle class in the coming years.

New Businesses Mean New Insurance

The growth of the middle class in China and India will not only appear in numbers of people, but in income levels of the current middle classes of these and other developing countries. A recent survey by Ernst & Young suggests that the purchasing power of the middle class in emergent economies is set to triple. The study expects 40% of global middle class spending to occur in Asia, which accounts for only 10% of spending today. [1] Growth in middle class purchasing power will show an increase in many consumables, including insurance and financial products. Companies that have diversified and created an international presence are set to gain the most from this trend.


Prudential’s Global Bet

International presence is Prudential’s greatest strength, and a large reason why the company’s Trefis price estimate is at $53, significantly ahead of its current market price.

Of this price estimate, a third comes from international insurance and investments, which has been a steeply increasing share of the company’s business. We expect this investment to continue along a steady upward path, and international insurance revenues are expected to reach $21.2 billion by 2018, if the company’s growth follows the current trend.

At the same time, the company’s growth in U.S. retirement solutions has been erratic since the 2008 subprime financial crisis:

Fortunately, the company has successfully weaned itself off of products for the American market so that its underlying value is not hit hard by this increasingly unreliable market. Even if American lawmakers fail to get the deficit under control, globalization and automation continue to threaten American jobs, and moral hazard and less corporate investment in America create uncertainty, Prudential should not be too heavily affected because of its geographic diversity .

Meanwhile, the current revenues of $13.1 billion in foreign markets has show no signs of slowing down, and revenue growth in foreign markets has even accelerated since 2010 for the company. Prudential has wisely diversified away from the troubled American economy, and is set to profit from the inevitable wage growth and purchasing power of emergent markets, making it a wise conservative investment for years to come.

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Notes:
  1. Rise of China’s Middle Class, Wikinvest []