Taking the long view on Asia
The credit crunch shook the Asia story for a while. De-coupling – the idea that the emerging economies in the region could keep on growing even as the developed markets of the West fell into recession – was debunked as it became clear that exports remained a key part of the economic miracle. But Asia has refused to lie down. Markets turned before those in the developed world and appetite for Asian “risk” is back.
The significance of Asia has increased over the past decade, with the size of the Asia ex-Japan economy doubling as a proportion of US GDP from 30% to 60%. It is estimated that China and India alone will account for this proportion within 12 years.
The potential for further growth is illustrated by the yawning gap between the penetration of some consumer goods in Western markets and those in Asia. There are, for example, just six personal computers for every 100 people in China compared to 80 in Britain. In France there are 496 cars per 1,000 people but only eight per thousand in India.
McKinsey estimates that middle-income earners in Asia will increase by 850 million within a decade so the prize for companies, both local and international, is tremendous. Thanks to the Asian propensity to save, the region’s consumers are much better placed than their heavily indebted counterparts in the West to increase their spending. Car sales in China are growing as fast as they are shrinking in the US.
It is not just the numbers of people or their spending power. Another important factor is the still early stages of the urbanisation process in the region. In Western Europe, the move to the cities had already taken place to a large extent by 1970 – 72% of the population lived in urban areas then and this had only risen to 76% by 2000 – but in Asia there is much further to go.
In China, the comparable proportions were 17% in 1970 and 36% by 2000, with a projected urban population of 60% by 2030. It’s a similar story in India and the region as a whole. The consequence of that population shift is mind-boggling in terms of commodity demand and infrastructure spending.
McKinsey expects China to have 221 cities with more than a million inhabitants each by 2025. There are just 35 such cities in Europe today.
Economic growth is plainly fundamental to the Asia investment story, but other factors are important too. The recent elections in India, for example, were widely viewed as a positive for the markets offering the prospect of continuing political stability. As a whole, Asian governments are seen to have made good progress since the upheavals of the late 1990s in terms of regulatory reform, restructuring of banking systems and the control of public sector debt.
So the long-term structural trends are favourable. Demographics are generally better than in developed markets. Political and economic developments have tended to be market friendly. The region is home to a large and growing number of world-class companies.
Despite all this, less than a tenth of the market capitalisation of global stock markets is found in the Asian region. And with markets trading at historically reasonable levels, the opportunities for profitable stock-picking are plentiful.
In the heat of the financial crisis towards the end of 2008, it became fashionable to dismiss the Asian growth story and the de-coupling thesis that went with it. As ever it has paid investors to keep their eyes on the horizon and to invest on the basis of the long-term story. The shift of economic and market power to the east has barely begun.