How to buy into Asia's consumer boom
Mar 12, 2008
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For more than half-a-century, we have been used to the idea that the US is the locomotive of the world economy, the primary force driving it forward and, occasionally, slowing it down.
Now that is changing. Last year emerging-market and developing countries accounted for almost 70 per cent of global economic growth, with China alone delivering twice as much of the growth as America.
One reason is industrialization of the Third World because of lowering of barriers to international trade, cheap resources such as labour, the way the internet revolution has opened up access to those resources, and the business-friendly policies of governments.
Another is the gathering momentum of the infrastructure boom as nations lay the foundations of advanced economies – roads, harbours, airports, and buildings to house public services such as schools and hospitals.
But even more important is the explosive growth of middle classes, especially in Asia, with both the spending power and the appetite to buy the goods and services of a comfortable lifestyle.
Over the past ten years “consumption growth has been phenomenal” in countries where there has been strong economic expansion off a low base, says investment bank CLSA Asia-Pacific Markets.
In its new study of the Asian middle classes based on 35,000 interviews in 11 nations, it says that over the past decade consumption spending in China, after adjusting for inflation, has surged 136 per cent. Real consumption over the same period rose 65 per cent in India, and almost 60 per cent in Malaysia, Singapore and the Philippines.
Profits to be made in property, banks, education and healthcare
“China and India will continue to storm ahead; there’s even a reasonable chance that India will catch up with China.” And “households in Malaysia, the Philippines and Indonesia should also achieve strong income growth, given that they’re coming off lower bases.”
What are the areas of opportunity for investors in this consumer spending boom?
“We see strong mid-term interest in property in China, Hong Kong and Malaysia, as well as positive longer-term support for the sector across most of the region,” CLSA says. In most Asian countries real estate is the most popular investment, accounting for 40 to 50 per cent of families’ wealth. Another motivation for buying is fear about the rising cost of housing.
“Demand for cars should be strong in countries where incomes are crossing the tipping point for discretionary spending,” the study reports. “Car-ownership levels in Asia appear to take off once per-capita gross domestic product reaches about US$3,000 – about where Thailand is now.
The potential for growth in demand for cars and related products such as vehicle fuels in the proximate future is clearly huge because of the populations involved – more than 2½ billion people in just three countries.
“In China per-capita income is about US$2,000 and car-ownership penetration is 8 per cent. With per-capita income among our middle class there rising about 20 per cent per annum, China’s car ownership levels should ratchet up within about three years. Indonesia, with per-capita income of US$1,600, will follow.”
Other areas of opportunity for investors include:
- Banks that can capitalize on demand for mortgage loans, financing of big-ticket items such as cars and household equipment, and credit-card ownership.
- Education. “The high priority that middle-class families throughout the region put on educating their children is often not fully appreciated.” In China, Taiwan and Thailand, about 15 per cent of family spending is on schooling. In several countries there are publicly-listed companies offering educational services.
- Healthcare will become increasingly important in countries with ageing populations. Again, there are listed firms operating in this sector.
The CLSA study concludes that Asia’s ageing population will increasingly “have a positive impact on [share] market valuations, as those approaching retirement save more of their incomes, putting some into equities.”
For the remainder of this decade, “equity markets in China, Indonesia, Japan, Thailand and South Korea are likely to be key beneficiaries. During the subsequent decade to 2020, this ageing dynamic should be more positive for equity valuations in India, although it should still be good for China, Indonesia and Japan.”
The Asian middle classes, CLSA reminds us, “is fast becoming the biggest consumer market in the world.”
By Martin Spring in On Target, a private newsletter on global strategy
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