It's perhaps the hottest theme in global investment. Speak to any emerging markets fund manager and there’s a strong chance he’ll tell you that he’s focusing on consumption stories. Meanwhile, developed world managers are keen to claim that their portfolios give EM exposure – but at a lower price and with less risk. So why are investors so keen on EM consumption? Is there a genuinely compelling story or is it just a convenient marketing hook? And is the sector already overheated in any case?

The first question is probably the easiest to answer. As EM residents become wealthier, they will buy more, both in terms of one-off discretionary purchases such as cars and televisions, and lower-key consumer staples such as foods, toiletries and household products.

Although far from exact, some studies have suggested that a per-capita GDP of around US$5,000-US$6,000 is something of a tipping point for an emerging market country. It’s here that consumption as a percentage of GDP, which is often falling up to this point as a result of high investment, begins to rise or at least stabilise. Beyond this, a growing number of people have individual incomes higher than US$5,000, meaning greater disposable income as well.

China’s GDP is around this level today. India’s is a few years behind, but growing quickly. This suggests that tens of millions of new consumers could be moving up the economic ladder for years or decades to come. This trend would be consistent with the mid-century consumer boom in the US and Europe, but on a much bigger scale.

In addition to the promise of strong growth in the underlying market, it’s likely that a few dominant companies will experience sustained exceptional growth as they expand their market share. In the developed world, markets like confectionary tend to be controlled by three or four firms with a range of brands; a dominant firm may have a market share of 30% or more. In many emerging market categories – although not all – the leading firm may have a relatively small share. However, as improving infrastructure and distribution make it possible to sell nationwide at lower costs, small regional producers can be pushed out and market leaders can expand their shares significantly.

Such firms could have several attractive qualities as investments. For many, capital expenditure needs are relatively low: the key investment is building a strong brand. This means that they can maintain a relatively high return on equity with relatively low leverage. Add in the stability of consumer staple sales during recessions (although sales of discretionary goods are by definition more volatile) and you have quite a safe-looking and compelling investment case. What’s more, because brands and reputation are a company’s key assets, there’s a huge incentive to protect them. This should encourage better-than-average ethical standards and corporate governance and thus better treatment of shareholders, at least in theory.

Still, investment returns are a function of both the nature of the underlying business and the price paid. The EM consumer theme is already popular and investors are beginning to pay more for it than for other sectors, particularly in Asia. Within the MSCI Asia ex-Japan benchmark, the consumer staples and healthcare sectors trade on forecast price/earnings ratios of 17 and 20, respectively, compared with an index p/e of 13 (the consumer discretionary sector has a lower p/e of 12). The situation is similar for the MSCI EM Asia index. Taking a developed market comparison, the S&P500 consumer staples sector trades on 14, healthcare on 11 and consumer discretionary on 15, against an index average of 14.

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