Asia contributes more to world GDP growth than US and EU do combined

Despite the low-growth world, Asia remains a bright spot. Underpinned by resilient domestic demand and strong growth in intra-Asia trade, Asian economies are less dependent on OECD countries than in the past.

Today, Asia contributes more to world GDP growth than the US and the EU do combined. The fundamentals of Asia are strong no matter how you look at them – one of the healthiest financial sectors in the world, overall gearing is low and balance sheets are strong for private and government sectors. Asian companies are more prudent in how they operate and their financial positions are sounder when compared with the days of the Asian financial crisis in 1998.

Opportunities in the region
The main reason I am optimistic about Asian equities is that there are some powerful economic and demographic forces that are driving growth in Asia.

On the economic side, when countries are poor, their savings rates are high. However once GDP per capita rises into the range between US$3,000 to US$10,000 savings rates decline and consumption becomes a larger portion of GDP.

In the past decade, for example, we saw China’s GDP grow from US$1,000 to US$4,000, or expand four times over. Over the same period, we saw car sales in China grow from one million a year to 17 million vehicles a year or by 17 times.

Many Asian economies such as China, Indonesia and Thailand have entered into this sweet spot for strong growth in consumption while other countries like the Philippines and India are not too far behind. This means that Asia is seeing strong domestic-driven growth and is less reliant on exports to developed markets.

In terms of favourable demographics, Asian economies are seeing a record number of people entering their peak earning years. At the same time baby boomers in the developed world are moving towards retirement, so they will need to tap into their savings to live and will consume less.

Put these two demographic shifts together and the world is about to see a massive shift in demand from the developed world to emerging markets especially those in Asia. On top of the demographic changes, there is the economic impetus of healthy salary increases coming through in Asia. This is leading to the emergence of a growing middle class in Asia – it’s expected to almost double to over a billion people in the next five years. China is expected to report the biggest absolute increase, while India and Indonesia will have strongest percentage growth.

Overall, Asia’s healthy financial system, robust domestic demand, low debt levels, high savings rates and the emergence of China as a global economic powerhouse will support a multi-year growth story for the region. It is for these reasons that I believe Asian markets have greater upside when global markets improve.
 
How are you playing Asia’s promising consumption theme?
In some cases I am investing in malls and department stores. In other cases, I look for brands that can take advantage of rising consumption. These can be local brands such as companies making shoes or fashion or those that own jewellery stores. There are some global brand names available too. Prada, for example, is now listed in Hong Kong and has got a healthy growth profile into China.

India is presenting attractive opportunities in this area. The country tends to be overshadowed by China, but it’s still expected to grow about 7% a year in coming years. While it’s not the 8%-plus of China, India is likely to soon surpass China in population. It’s a young market as far as the demographics go. The emerging middle class in India is something that will be of great interest to many companies in coming years. We are seeing demand changing already. Motorbikes were the prime mode of transport but you’re now seeing some of the new wealthy switch to cars and so on.

There are some fantastic management teams in charge of local companies that are taking advantage of the opportunities presented there. Housing Development Finance, for example, is a bank there that I’ve looked at for more than a decade and every year, it grows 20%. The bank provides mortgages and you can just imagine how the demand for better housing will rise as incomes increase. The bank is expanding with the market, delivering very consistent returns. It’s an efficient bank – it probably has the lowest costs in financial services on the planet.

What type of companies do you look for?
My objective is to invest in good quality companies at an attractive price. Typically, these companies have strong management teams and a well-defined growth profile within the region. I keep a lookout for companies that have the potential not only to be successful within their own country but also on a global scale. Some businesses have already managed to do that.

The Koreans in particular have been successful in developing global brands. Samsung Electronics is already the world’s number one producer of flat-panel TVs and smartphones and makes consumer products such as fridges and washing machines for Asian consumers. Similarly companies such as Hyundai Motor that have strong market share in emerging markets and growing market share in developed markets have the potential to deliver strong earnings growth even as Europe enters recession.

Korean cosmetics companies such as Amore Pacific and LG Household & Health Care are doing well in China. Korean brands are respected in China and they are likely to build on this achievement over the next five years.

How is Asia faring in its battle with inflation?
Except for China and India, both of which saw positive inflation surprises driven by food in March, inflation momentum for most in the region remains relatively benign. Recent slides in commodity prices, especially oil, provide a welcome relief. Moreover, headline inflation readings are now well below most central banks’ inflation targets. Lowering inflationary pressure should prompt further easing of monetary policy in Asia.

Are deep structural problems festering in China such as a property bubble?
It is a risk that all investors spend time analysing. One of the things that we take comfort in is that China’s been through a similar growth phase in the past decade and that there were times when office buildings were in oversupply and now they’re not. The risks that some of these issues will hamper the Chinese economy are low.

In China, houses are usually 100%-paid-for two years in advance – and with cash and not borrowed money – so the ripple effects of a collapse in property values are not that bad to the rest of the economy, nor the banking sector.

Does that mean investors should avoid property developers or banks that are lending into those sectors?
Prima facie that would be the case. And for most of last year I didn’t investing in Chinese banks or property developers. But the prices became so attractive that I’m have recently. Evergrande, a developer in China, was recently trading at a 76% discount to its net asset value and only four times earnings. That was too good to pass up as the company is doing projects that are pretty much 100% pre-sold. It’s just got to build these developments and as soon as it’s finished them the cash of buyers that’s been sitting there becomes income.

4 June 2012
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