Thematic Global

12 November 2018

� Consumers across the world are shifting their spending away from traditional products and services

� New consumers have arrived (tech-savvy youth, “empty nesters”, emerging market customers) and many globally are concerned with health issues and drawn towards experiences rather than products

� We look at these three themes across regions and sub-sectors and discuss why they are important for investors

Where share of wallet will go nextFuture Consumer

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� Investors need to be aware of changing consumption trends to improve investment decision making

� New consumers (tech-savvy youth, “empty nesters”, emerging market clientele), increasing focus on health and a preference for experiences over goods are emerging themes

� These themes also have implications for how businesses deliver products and services to the changing demographic

It is important for investors to be aware of the mega-trends driving consumption when considering investment decisions.

The tastes of the new, digital consumer are driving new ways of consumption as, for example, they are more likely to shop online or stream media. This demographic is also more likely to adopt new technologies, such as ride hailing apps or using crowdfunding. The demands of an older generation, ageing gracefully with assets and spending power for the first time will be crucial to the overall demand for leisure activities. In emerging markets, consumers are becoming wealthier and are diverting more spending to transport, information technology and services.

Consumers around the world are also looking for healthier ways to live, especially as the population ages. And on top of all of this, the sweeping demand for experiences, as consumers prefer to spend their time on holiday, at restaurants or seeing a show is also an increasing trend.

These have implications for manufacturers of products and services across the world. We see these as unstoppable trends, driven by significant demographic changes in the global economy, which will be crucial for investors to understand when considering investment decisions.

Executive summary

Young consumers are more willing to take on new forms of consumption

Source: PEW Research Centre, Shared Collaborative and on demand; the new digital economy, May 2016.

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� Demographic shifts are changing quickly, impacting consumer spending patterns

� We highlight three emerging trends – tech-savvy youth, “empty nesters” and emerging market consumers

� Younger consumers are more likely to adopt new technologies, whilst retirees are wealthier than ever before

a. Youth

Increasing in number and influence

The shape of the world’s population is changing quickly: in the west, people are hitting retirement age faster than ever, while in the emerging world, young populations are continuing to grow quickly – with more and more people of prime consumption age (35-54).

Even in ageing populations, young consumers will matter more and more in coming years. In the US and China, the biggest economies in the world, the age group with the highest number of people is the late-20s, and over the next decade or so, this group will become prime-age consumers, with more disposable income and playing a bigger role in aggregate consumption in these countries.

A tech-savvy consumer

This younger demographic does things differently. They are more likely to shop online, more likely to stream media or shop around for a bargain and less likely to use cash. Many of these macro trends that have started to emerge post-financial crisis will not just continue, but may well amplify.

These trends are supported by our HSBC survey data. When we asked respondents about how often they used and plan to use key e-commerce sites, millennials in China overwhelmingly stated that they would spend at least the same, if not more on key e-commerce websites, and in the US, consumers indicated that they were

1. A new generation of consumers

The model consumer in the US and China is late-20s and will become a prime-age consumer over the next decade

More likely to shop online, more likely to stream media or shop around for a bargain, less likely to use cash

Millennials are generally considered as people aged between 18 and 34

The US population has many people in their late-20s...

Source: UN Population Division. Note: 2018 data

...as does China’s

Source: UN Population Division. Note: 2018 data

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frequently visiting e-commece sites − only 20% of millennials did not use e-commerce sites at least once a week (compared to 52% of respondents ages 51-65).

When we asked US consumers to rank their top three favourite products to buy online, 60% of millennials surveyed liked to buy apparel and accessories online. A close second for millennials was electronics (58%) and only 5% said they don’t buy anything online.

These younger generations are more connected − in both developed markets and emerging markets. Based on current trends, roughly two billion emerging market consumers will find their way online via smartphones in the next few years, opening up a new world of consumption.

More willing to adopt new technologies

Technology adoption is a crucial part of the story, but it is only the beginning. These digital natives have grown up with technology in their hands and are already showing a willingness to adopt new technologies more so than older peers. Our own proprietary survey on US consumers found a clear differential in how perceptions over autonomous cars vary by age groups, while Touchstone Research data suggests that this younger generation is more open to buying a virtual reality headset1.

This generation has already shown its willingness to use new types of products and consumption forms, be it ride hailing apps such as Uber, using crowdfunding such as Kickstarter or even hiring a handyman on the likes of TaskRabbit.

As this share of the population becomes more significant to overall consumption, we may see aggregate tastes shift; not just toward existing disruptive technologies but this consumer group may also facilitate the rapid rise of newer technologies as and when they come to market.

Favourite products to buy online for millennials: apparel/accessories and electronics

Younger generation more willing to use Uber, Kickstarter or TaskRabbit

Digital natives are those who have spent their entire secondary education in a country with an internet adoption rate above 50%

This consumer group may facilitate the rapid rise of newer technologies as and when they come to market

1 Leibach, Howie. Meet the consumers that will make or break virtual reality next year. SingularityHub, 17 Dec 2015.

What do US consumers like to buy online?

*Generation X defined as aged 35-50, Baby Boomers defined as aged 51-65 Source: HSBC US Anatomy of Consumer 18 Jan 2018

0% 10% 20% 30% 40% 50% 60% 70%

I don't buy things online

Food & beverage

Other

Home improvements

Entertainment

Household goods

Electronics

Apparel & accessories

Millennial Generation X Baby Boomer

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b. Empty Nesters

Older generations a new source of consumption growth

Many of the trends that we see among younger generations: a greater willingness to travel, spend money in restaurants and looking after themselves are also being seen in older generations.

This is important, because of all the demographic trends set to influence the world economy over the next few years, none is quite as clear as the rising number of older people. Across the world, the number of over-65s is set to rise at a pace not seen before (see below), while across the developed markets, this generation is set to make up a bigger and bigger share of the overall consumer group.

Typically, ageing populations would be a clear negative for consumption (retirees typically have lower incomes and lower propensity to spend). But in developed markets, the 50 million people set to hit retirement age in the next decade will be the first to retire with a substantial amount of assets, wealth and spending power, having been able to purchase homes at much lower prices relative to income. In the US, more than 80% of retirees own their own home today, with nearly 20% owning another property2. And as the charts below shows, financial assets have shifted into older generations over the past few decades: today’s retiring generation has money to spend and will be a key part of the global consumption picture, despite lower incomes.

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The world’s number of over-65s is growing at the fastest pace ever

Source: UN Population data

Populations in the West are heading towards this age bracket

Source: UN Population data. Note: 2018 data

“Empty nesters” are older, have children who have left home, and are retiring wealthier than before

The number of over-65s is set to rise at a pace not seen before globally

50 million people set to hit retirement age in the next decade would be wealthier than ever before

2 Based on data from the 2016 Federal Reserve Survey of Consumer Finances.

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While this trend is clearly visible in the developed world, China’s empty nesters comprise another theme clearly evident in the emerging world as older generations have access to spending power and time for the first time.

Some demographers believe that this is the largest, fastest-growing consumer segment on the planet. To put some numbers around this group – Chinese households with occupants aged 40 or above and earnings ranging between USD20,000 and USD125,000 are projected to grow from 99m in 2016 to 220m in a decade3.

It is this group that we believe will be the single largest driver of consumption in China in the next decade. This is illustrated in the below chart; these higher income level groups are likely to be the key driver of overall consumer spending in China in the coming decade.

Tastes of the older generation increasingly important

This means that this older generation – who are wealthier than any retiring generation in history – will see their tastes play a big role in driving global demand and a wave of new products. This could be home improvements now that their children have moved out from home or simply a generation that is more active than those who went before it: more willing to travel, to exercise and to simply have fun.

China consumer spending (USD bn) is increasing, especially in high income brackets

Source: Survey of consumer finances. Note: Shows per head wealth, calculated using the proportion owning financial assets and median holdings of those who do.

Source: Global Demographics, HSBC

...whose spending has outpaced income growth

Assets have shifted towards older generations

Source: Consumer expenditure survey, Bureau of Labor statistics. Note: 2011 to 2016.

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Older generations are already having an impact on foreign travel and eating out

Some demographers believe that this is the largest, fastest-growing consumer market on the planet

3 Global Demographics, a demographics consultancy

01000200030004000500060007000

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<10k 10-20k 20-50k 50-125k 125k+Househld income (annual)

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c. Emerging consumers

Emerging economies playing a bigger role

On top of these two demographic shifts, more and more wealth is moving from developed to emerging markets (now >1/3 of total world consumption) leading to even more changes in global consumption patterns. The chart below shows how consumption patterns change with income – more spending is diverted to transport, information technology (IT) and services (much of the “other” category) and away from food and energy.

More spending diverted to transport, IT and services and away from food and energy as income increases

Spending patterns change clearly by income level

Lowest

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54%6%8%7%4%0%3%4%3%0%9%2%Food and Beverages

Clothing and Footwear

Housing

Energy

Transport

Water & Utilities

Education

Health

ICT

Financial Services

Others

Personal Care

*ICT = Information, communication, and technologySource: Consumer expenditure survey, Bureau of Labour statistics, 2011-2016. Note: World Bank definitions of income groups.

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Globally, more spending will likely be heading towards transport and importantly the “other” category that includes recreation

This alongside the convergence access to technology will likely make spending more similar between income groups. And so globally, more spending will likely be heading towards the sectors currently under-purchased by the low income group relative to high income – transport, and, importantly, the “other” category that includes recreation.

These new consumers are overwhelmingly hungry to spend. When we asked c2,000 consumers in China about their anticipated spending habits for 2018, they overwhelmingly replied they would spend the same or more in every single category we asked.

Survey respondents would spend the same or more in every single category we asked

Chinese consumers would spend the same or more in every catergory asked

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Cosmetics,perfume,skincare

Watches Jewelry Ready-to-wear Shoes Accessories Luggage

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Source: HSBC

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� Large numbers of people around the world are starting to eat more healthily and do more exercise

� Additional data available via smartphones is making people more aware of their health

� The world looks set to seek new avenues of healthy living, especially as the population ages

Consumers becoming more health conscious

While the demographic shifts are important, tastes are clearly changing too. Obesity has been on the rise across all income brackets in the world over the past few decades to the stage where now 25% of adults in high income countries are obese, according to the World Health Organisation.

But there are early signs that this is changing. In response to the rise in obesity, large numbers of people around the world are starting to take action by doing more exercise or eating more healthily. Data from Nielsen, shown in the chart above, suggests that more than 70% of people are changing their habits in an effort to improve their health – with Asia and North America standing out. And data we can collect from the Centers for Disease Control & Prevention in the US shows that over the past couple of decades, the amount of aerobic activity is on the rise.

2. A healthier consumer

People around the world are doing more exercise or eating healthier

Althought obesity has been rising...

Source: World Health Organisation

...consumers may be looking to live healthier lives

Source: Nielsen: We are what we eat: Healthy Eating Trends around the world, January 2015.

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People are exercising more...

Source: Centers for Disease Control of Prevention:https://www.cdc.gov/nchs/data/nhis/earlyrelease/earlyrelease201705.pdf

...and smoking less

Source: World Bank

On the health and wellness side, the share of adults who smoke cigarettes has been falling for some time (see above) as information over the damaging impact come to the fore, while the additional data available to individuals via their smartphones is making people more aware of their own health. This trend is both age and income agnostic. Data from the NPD group, a market research company, suggests that, at least in the US, fitness tracker ownership is well split between age groups and income brackets.

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% of male adults

% of male adults

Smoking prevalence amongst males

At least in the US, fitness tracker ownership is evenly split between age groups and income brackets

In the UK, binge-drinking is on the decline across almost all age groups

People are looking for new ways for healthy living

Ownership of fitness trackers is diverse

Source: NPD group/Connected Intelligence Consumers and Wearables report. Data as of 2015.

Healthier habits across all age groups

We are seeing similar health-enhancing behaviour across age brackets too. In the UK, data suggests that binge-drinking is on the decline across almost all age groups – possibly in response to a healthier living culture that has started to spread, at least partly driven by the tastes of younger generations. Also in the UK, the market research group Mintel suggests that gym attendances could rise by 20% between 2016 and 20204.

So the world looks set to continue to seek new avenues for healthy living, especially as the population ages. These trends are supported in our HSBC surveys as well − younger consumers in China and in the US both said they were likely to spend at least the same or more on sportswear (64% US millennials, 55% US Generation X, and 85% Chinese millennials5). When we asked US consumers directly how often they exercised, 72% said they exercised at least once per week.

4 Health and fitness club-going Brits forecast to grow 20% by 2020. Mintel Press Office, 19 Aug 20165 Millennials defined as aged 18-34 and Generation X defined as aged 35-50

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Male Female 16-24 25-34 35-54 55+ < $45k $45-74.9k $75-99.9k > $100k

Gender Age Income

%% Ownership share of Fitness Trackers and Smartwatches: US

Fitness Tracker Smartwatch

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%% Share of US adults who met federal guidelines for aerobic activity

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� Discretionary spending is increasingly moving away from goods and towards services

� Globally, people are prioritising spending on entertainment and experiences

� Travel, in particular, becomes a higher priority as consumers become wealthier

More ‘fun’ than ‘stuff’

This global shift in spending will only serve to amplify another trend sweeping across all age groups: the preference to consume ‘fun’ rather than ‘stuff’. In a world where many discretionary spend products are now available either free, on a subscription basis, or as part of your mobile phone: think television, movies, music, maps (and GPS), clocks, watches, cameras and diaries, it’s no surprise that discretionary spending is shifting more away from goods and towards services.

The last few US Consumer Expenditure Surveys (CES) show a clear trend, particularly amongst younger generations, that a higher share of “non-core” spending, that is excluding healthcare, food, housing and transport, is diverting away from goods and towards experiences.

This trend is often reported as one that is very much focused on millennials, who are often reported to be more willing to spend on simple luxuries such as avocado on toast at the expense of saving to own a home6. Surveys suggest that this age group (currently aged 18-34) value experiences and continue to spend more time and money on them.

3. It’s all about the experience

The age group 18-34 values experiences and continues to spend more time and money on them

Discretionary spending is increasingly shifting away from goods and towards services

Spending on experience is rising across all age groups, but notably the young

Source: Fedearal Reserve Consumer Expenditure Survey. Note: “non-core spending” defined as total spend minus: healthcare, food at home, housing, transport, insurance/pensions and education. Experiences defined as food away from home and tickets for entertainment.

6 Levin, Sam. Millionaire tells millennials: if you want a house, stop buying avocado toast. The Guardian, 15 May 2017.

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Share of non-core spending that is on experiences by age group and year

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It’s not only millennials

But it’s not just a trait of this generation (who also may be more willing to take to the internet to document their experience7), as the excellently named paper by Amit Kumar et al., Waiting for Merlot8, suggests. The authors note that the psychological reaction in waiting for experiences is more exciting and pleasurable than waiting for a material good.

And this is backed up by the data – in the US, personal consumption data shows that package holidays, personal care and entertainment ticket spending continues to rise at a faster pace than aggregate consumption. Survey data backs this up on a global basis – in the US, UK and China, travelling is seen as more important than buying a home, a car or paying off debt.

Globally, people are prioritising entertainment and experiences

The number of high-net-worth individuals globally is increasing over time

Most people’s aims are to travel and experience things, not product ownership

High new worth individuals worldwide (m)

Data as of Nov 2016Source: GfK, Airbnb

Source: World Wealth reports, CapGemini

In a study conducted by Capgemini, we see that the number of high-net-worth individuals, defined by Capgemini as those with USD1million or more of investable assets, globally is only increasing over time. The biggest increase is obviously in Asia Pacific (see chart below), but it is worth noting that across the globe, there are more high-net-worth individuals today than there were ten years ago. As consumers get wealthier, travel becomes one of their biggest priorities, but so does spending on products that were previously unaffordable – new experiences through premium products.

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Thinking about the next five years, which two or three of the following are most important to you?

7 Lewis-Hargreave, Sam. Millennials only want experiences that can be shared on social media. Huffington Post, 2016 Aug 14.8 Amit Kumar, Matthew A. Killingsworth, , Thomas Gilovich, Waiting for Merlot: Anticipatory Consumption of Experiential and Material Purchases, Psychological Science, Vol 25, Issue 10, pp. 1924 - 1931

1.9 2.1 2.2 2.4 2.6 2.8 2.4 3.0 3.3 3.4 3.7 4.3 4.7 5.1 5.5 6.22.5 2.5 2.6 2.8 2.9 3.1 2.6 3.0 3.1 3.2 3.4 3.8 4.0 4.2 4.5 4.8

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Asia-Pacific Europe North America Other (Latam, Middle East, Africa)

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� Major shifts are taking place in the way the world consumes and how businesses operate, impacting investment decisions

� New consumers both in terms of age and geography are becoming more relevant as they grow in number and influence

� Health issues are a growing concern and consumers are preferring to spend on experiences rather than goods

Impossible to ignore

And so investors need to be aware of three mega-trends driving consumption. The tastes of the new, digital consumer. The demands of an older generation, ageing gracefully with assets and spending power for the first time will be crucial to the overall demand for leisure activities. And on top of all of this, the sweeping demand for experiences, as consumers prefer to spend their time on holiday, at restaurants or seeing a show. These have implications for manufacturers of products and services across the world. We see these as unstoppable trends, driven by significant demographic changes in the global economy, which will be crucial for investors to understand.

Conclusion

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1. This report is dated as at 12 November 2018.

2. All market data included in this report are dated as at close 11 November 2018, unless a different date and/or a specific time of day is indicated in the report.

3. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC’s analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC’s Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

4. You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument.

Disclosure appendix

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