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While there has been much talk in recent years about the Asian region and its growth, we believe its potential as an investment opportunity is still under-appreciated, Its fast-evolving structure gives it potential to rival the rest of the world over time.
The IMF has forecast that the Asian region will become the largest contributor to the world’s economic momentum – not just by the rate but also by the size – within the next couple of years. We agree with the spirit of this comment, and when we expect that the US and Asia are increasingly the dominant drivers of world growth.
Furthermore, in a world defined by increased political tensions, the ASEAN group is likely to be more coordinated. Geopolitical issues such as Brexit and the US-China technology rivalry and trade tensions continue to affect many Western economies. However, various countries with the Asian region are well-positioned to navigate these issues and benefit from the ongoing turmoil, most notable of which is supply chain re-orientation towards the south.
The major drivers of structural opportunities for investors in Asia over the next few years include:
The ability for individuals and businesses to access affordable financial services is key for sustainable growth. There has been good progress across the region, although the level of inclusion remains low by developed world standards. In India, for example, the number of deposit accounts has grown from 35% of the adult population in 2011 to 80% in 2017, thanks to the government’s financial inclusion and a 'banking for all' programme. Less encouragingly, many accounts are inactive or have zero balances.
More broadly, this is an opportunity to benefit from the earnings growth that will be experienced by companies that can offer a range of financial products and services over time, starting with basic functionality (deposits, loans, transfer services etc.) all the way to a more progressive proposition, which includes insurance.
The evolving domestic consumption and service trend in the Asian region has resulted in significant benefits for many businesses. On a selective basis, their risk-reward has improved thanks to lower equity valuation premiums (in the last two years) despite solid earnings growth, offering good opportunities for investors. This includes businesses in the technology, e-finance, logistics and consumer discretionary sectors. Other sectors that are likely to benefit include education, leisure and travel, and entertainment and digital such as gaming, videos, etc.
Given that Asia’s economic growth will be increasingly driven by domestic factors rather than external trade, we are increasingly focused on companies that are serving a local customer.
Southeast Asia is well-positioned to be the prime beneficiary of the ongoing trade tensions and supply chain reconfiguration, and we are already seeing this manifest itself.
Manufacturing and production is gradually moving inland and towards Southeast Asia, with Foreign Direct Investments (FDI) flowing into countries like Thailand, Indonesia, Malaysia, Philippines, Cambodia and Vietnam.
For example, German automakers are manufacturing various car models in Thailand, which is now an auto-industry hub (for many parts of Asia). Malaysia is becoming a highly credible IT manufacturing hub, and corporates such as Taiwanese power components supplier Delta Electronics is planning to turn its Thailand-based affiliate into a production subsidiary to diversify from its production bases in mainland China.
Vietnam in particular has an emerging manufacturing and exports sector that is yet to flourish at a larger scale. However it has a GDP per capita similar to China’s 11 years ago, and is growing at 7% a year. The potential of such centres is one of the most exciting in Asia, as they offer new markets for rising consumption and stronger trade related opportunities for investors.
ASEAN’s rise is also empowered by an emerging technology economy, which is seeing investments in areas such as research and development (R&D) activities and e-commerce including fintech. Apple has recently established its first Indonesian R&D facility; Dyson has opened a technology centre in Singapore; Nissan is starting an R&D facility in Thailand; and Samsung is building an R&D centre for mobile phones in Vietnam. Google is moving its Pixel smartphones production out of China to Vietnam to avoid higher manufacturing costs and build a cheaper supply chain in Southeast Asia.
These initiatives will be further boosted by China’s 'Belt and Road' initiative which will boost infrastructure and connectivity across the region.
Infrastructure is a major consideration for the Asian region. It is estimated that the developing parts of Asia will need to invest $1.7 trillion a year until 2030 in infrastructure if it is to maintain its growth momentum sustainably. Currently, it is investing an estimated $880 billion a year, leaving an investment gap of around 2.5% of projected GDP for the next few years, based on United Nations and Asian Development Bank sources. Taking China – which has been investing in infrastructure for the last 20 years – out of this equation, the gap widens to 5%. This represents an investment opportunity at multiple levels, including airports, highways, ports, power systems, transit systems and telecommunications.
A key element will be a regulatory framework to make infrastructure more attractive to private investors and to generate a pipeline of projects for public-private partnerships.
As well as being home to some of the youngest populations, the Asia Pacific region is also the fastest-ageing region in the world, with some of the oldest societies.
It is currently home to around 550 million people aged 60 or above, just over half of the world’s total senior population. This is expected to increase to around 1.3 billion people aged over 60 by 2050. While Japan is currently a significant proportion of this demographic (where 27% of the population is aged over 60), China is ageing rapidly. At the moment, 17% of the country’s population is aged over 60 and by 2050, this will climb to 35%.
Markets will therefore move from a period where they have benefitted from the 'demographic dividend' to one where they face a 'demographic tax' burden. A direct outcome of this will be demand for elderly healthcare and a framework to support this. For investors, there are two complementary opportunities. Not only is per capita spend growing at a rate higher than economic growth in various parts of Asia (thus creating a large healthcare market) but in many countries, government investment in healthcare is inadequate to keep up with demand, thus creating attractive private sector investment opportunities.
Asia is an environment ripe for differentiation and targeted opportunity. We believe that Asian markets are reaching the end of their adjustment process, following a significant period of macro-led weakness in 2018 due to global and idiosyncratic issues in broader emerging markets (such as Turkey and Argentina).
The shift towards floating exchange rates, less reliance on offshore debt, developing central bank credibility, and inflation targeting regimes, creates a strong foundation for investment opportunities in Asia.
However, it requires the ability to embrace short-term macro setbacks and higher levels of volatility, but the opportunity created by these five major sub-themes and the far-reaching economic changes this brings, is significant.