Megatrends: Asia rising

From
Charles Stodart

Charles Stodart

The centre of global economic activity has seen a clear shift away from Developed Markets and towards Emerging Markets since the turn of the century. China has been at the heart of this. However, the traditional drivers of growth that have propelled Emerging Markets to this prominence are becoming unsustainable. The next stage of growth will be driven by the rapidly growing middle class and should ultimately prove both more sustainable and more significant.

Emerging markets are becoming a powerful force within the global arena and their contribution to global growth has become significant. China is undoubtedly the dominant player in this space.[1] China’s significance is perhaps unsurprising, given her massive population advantage[2] but what has been startling is her continued pace of growth since market reforms were introduced in 1978, driven by a period of rapid industrialization and urbanization, and she has subsequently overtaken such global powerhouses as Germany and Japan.

A change in direction

China’s recent growth has been led by capital-intensive fixed investment, particularly infrastructure, buildings and equipment. This has been a boon for commodity-exporting countries, such as Brazil and Australia, as they have fed China’s voracious appetite for materials, including iron ore and coal – the so-called ‘commodity super-cycle’.

However, China’s reliance on Fixed Asset Investment as the primary driver to her growth is now becoming unsustainable. China’s economy has become unbalanced, debt levels are high, the allocation of resources has been sub-optimal and pollution has become a challenge. While demand for materials will not evaporate, the next stage of China’s development will see growth increasingly led by other parts of the economy.

A burgeoning middle class

While this transition will not be without its challenges, certain factors already in place are supportive. China’s strong GDP growth has fueled significant expansion in GDP per capita, which has roughly doubled every 5 years since 2000. More importantly, wage growth has also been strong and income per capita is now reaching a level at which domestic consumption typically starts to grow quickly.

Discretionary spending is expected to account for close to 50 per cent of a household’s total expenditure in urban China by 2025, up from a third in 2000[3]. More broadly in Asia, the middle class is expected to rise from 525 million in 2009 to over 1.7 billion by 2020. This megatrend is about the rise of the middle class and, with it, the rise of aspirational demand.

The investable opportunities from a rising middle class

This next stage of growth in Emerging Markets present significant investable opportunities. Several interesting sectors are already appearing, including fashion, technology and financial services, though it will also require a more direct investment approach.

Household consumption

Identifying companies that can respond to the growing consumer demand for things like clothing, food or technology will benefit from a rising Asian middle class. They’re more likely to be local companies that can provide affordable local brands. Companies such as Anta Sports – the leading domestic sportswear brand, or Cosmo Lady – the leader in ladies intimate wear, are worth calling out. Other locally-listed sectors to watch are food and beverages.

Technology platforms

More than 50 per cent of the Chinese population (roughly 700 million people) has access to the internet, with mobile devices having recently overtaken traditional broadband. As discretionary consumption grows, several local internet giants have already established strong platforms and are looking to extend their dominance as they now shift their business models to a mobile platform. These companies are set to benefit from the growth in the continued take-up of mobile internet in China and, more broadly, from the expansion in consumer discretionary spending. Baidu, for example, is the leading search engine company in China, with close to 85 per cent of all search engine advertising dollars in 2014, and continues to invest heavily in its mobile platform.

Financial services

A growing demand for savings products is also expected from the growing Asian middle class. This includes savings and transactional banking, insurance, and wealth management. It’s worth noting that low insurance penetration across the Asian region, coupled with favorable demographic changes, means there is strong growth potential in the medium term. A company set to benefit is Hong Kong-listed AIA Group, the market leader in the Asia-Pacific region based on life insurance premiums

Services

Other investable areas to call out are based around services including healthcare, technology, tourism and logistics.

The significance of emerging markets as a contributor to global growth has become quite evident. China has seen a period of startling growth fueled by rapid industrialization and urbanization but this hasn’t been without its challenges. The need for economic returns and a better allocation of capital is a challenging but important part of much needed economic reform. Within the next few years we’ll see a widening middle class with consumer discretionary spending and aspirational demand expected to grow substantially as a result. China’s determination to open its capital markets suggests that there are strong medium-term growth opportunities in sectors like household consumables, technology, financial services and other services like healthcare and tourism. Investors need to consider what sectors offer the most promising growth opportunities from here, and how they can participate in a way that reasonably protects their capital.

By Charles Stodart, Investments Specialist, Zurich Investments

Read other Zurich ‘Megatrends’ articles:

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[1] Greater China, including China, Hong Kong and Taiwan, accounts for nearly 40% of the MSCI Emerging Markets benchmark. Total Asia accounts for nearly 70%.

[2] Asia’s population numbers 4.4bn in total (or 60% of the world’s population), led by China at 1.37bn (19%)

[3] McKinsey & Co (2010)

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Important information: The content of this publication are the opinions of the writer and is intended as general information only which does not take into account the personal investment objectives, financial situation or needs of any person. It is dated September 2015, is given in good faith and is derived from sources believed to be accurate as at this date, which may be subject to change. It should not be considered to be a comprehensive statement on any matter and should not be relied on as such. Neither Zurich Australia Limited ABN 92 000 010 195 AFSL 232510, nor Zurich Investment Management Limited ABN 56 063 278 400 AFSL 232511 of 5 Blue Street North Sydney NSW 2060, nor any of its related entities, employees or directors (Zurich) give any warranty of reliability or accuracy nor accept any responsibility arising in any way including by reason of negligence for errors and omissions. Zurich recommends investors seek advice from appropriately qualified financial advisers. Zurich and its related entities receive remuneration such as fees, charges and premiums for the financial products which they issue. Details of these payments can be found in the relevant fund Product Disclosure Statement. No part of this document may be reproduced without prior written permission from Zurich. Past performance is not reliable indicator of future performance.

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