As the West Ages, Asia Grows

Ancient Chinese architecture


Neil Dwane summarizes our recent AllianzGI Asia Conference in Berlin: Increased intra-regional trade, reform-minded leaders and positive demographic trends help Asia provide the growth and income potential that today’s investors need.

Key takeaways

  • With low growth and financial repression still plaguing many developed markets, investors need growth potential – and Asia is in a good position to provide it.
  • With the extraordinary future growth of Asia’s middle class, the centre of many investment opportunities for individuals and corporations is moving east.
  • Because growth in Asia can be fuelled and financed regionally, increasing Western populism and trade friction should have a smaller impact.
  • Key investment implications: China is still the main growth engine, but India is on the rise; Asian tech giants could outgrow US counterparts; Asian bonds may help investors earn attractive income; and structural reforms offer strong clues to growth potential.

Our clients and investment professionals recently met in Berlin for our annual AllianzGI Asia Conference. Here are some of the highlights from two days of discussions and events, which provided our guests with a host of investment insights about the world’s most dynamic region.

If the globalization tide turns, Asia can swim against it

Asia has long been a beneficiary and a driver of globalization – a force that has increased prosperity and opportunity around the world. In fact, after decades of globalization, the gross domestic product of Asia (excluding Japan) is twice the size of Europe’s when adjusted for purchasing power parity. And by 2020, Asia (ex-Japan) should provide 40 per cent of the world’s GDP.

Yet even if the political tide in the West turns against globalization and toward populism, Asia is well-positioned to swim against it. The growth of intra-regional trade within Asia should make America’s growing protectionism less menacing, at least economically. Moreover, China’s “One Belt, One Road” initiative should, over time, boost economic development throughout the region and across its frontiers. This should increase the size of many markets in Asia, which would give corporations an abundance of choice about where to invest their resources.

Reforms are changing how investors look at China

Over the years, investors interested in Asia’s growth potential have rightly focused on China, which has been transitioning from an economy focused on manufacturing and exports to an economy focused on services and consumption. China has a currently manageable overall debt burden, but its rate of growth will inevitably start to slow. Nevertheless, Beijing possesses the tools needed to manage growth – chief among them the ability to manage leverage inside its banks and state-owned enterprises.

For their part, China’s savers have developed a reputation for being very short term and aggressive in the demands they place on China’s banks. Yet there are new signs that – at least outside the property markets – the Chinese are looking to save for their health care and welfare in a more structured, sustainable fashion. Moreover, outside of China itself, Asia has a strong Chinese diaspora that is keen to invest in China’s prosperity, even if other international investors are awaiting the enactment of additional legal, regulatory and political reforms.

Reform will certainly be on the agenda at China’s Communist Party congress in November: Prime Minister Xi Jinping has kept up his reform efforts and projected stability as he prepares to present his Five Year Plan.

Elsewhere in the region, South Korea seems to be getting closer to making significant reforms to its chaebols – the Korean term for large conglomerates – to release innovative talent and excess capital for reinvestment.

Asia is experiencing significant demographic shifts

South Korea and China are, like the West, suffering from the greying of their populations. And despite increasing levels of household earnings around the region, there is still a risk that many Asians will neither save enough nor have enough children to survive without government assistance.

At the same time, there is an important mega-trend taking shape across the region: the emergence of the Asian middle class. While the global middle class has already grown at an extremely rapid pace, Asia is set to account for even more explosive growth in the coming years. This represents extraordinary potential spending power over the coming decades.

Asia’s overall population is also young, increasingly well-educated, technology-enabled and hard-working – and the median age is only 30 in Asia vs. 42 for Europe. The Philippines, India and Indonesia, in particular, are blessed with young and growing populations. Overall, this puts the region in a strong position, demographically speaking, compared with the US, Japan and Europe.

India’s prospects look increasingly bright

The ongoing attention many investors are paying to China may, in part, be obscuring the progress now underway in India and Indonesia. For its part, India has started to re-awaken as several of Prime Minister Narendra Modi’s policies become increasingly popular:

  • Demonetization is shining much-needed light into the “black economy”.
  • The new general sales tax should enhance government and state finances, boosting capital expenditures and reinvestment.
  • Aadhaar – a powerful biometrics-based identification system – should reduce corruption, ease unemployment and improve the distribution of subsidies.

All told, India could be inching closer to establishing a virtuous circle of progress, where better tax transparency leads to stronger government finances. This would lead to improved employment, and then to bigger markets. Next could come larger profit pools and better returns to equity investors, and so on. Either way, Indian companies have tended to focus more on profits and returns than their Chinese counterparts, which have generally focused on increasing market share. As such, investors in Indian equities should be rewarded by the improved growth and clearer political policies of the Prime Minister Modi era.

Disruptive forces are changing corporate behaviour in Asia

While the big US tech companies – such as the FANGs (Facebook, Amazon, Netflix and Google) – have held sway in other markets, they may not be able to fully capitalize on the true potential that Asia offers. That’s because their brands and culture may not be sufficiently local enough to appeal to Asia’s millennials.

Instead, a growing number of Asian high-tech firms – including China’s BATs (Baidu, Alibaba and Tencent) – are well-positioned to meet the needs of nearly 4 billion consumers in Asia. In fact, it is entirely possible that these names could become larger than their US counterparts, thanks to their ability to stay “plugged in” to what regional consumers want. It is also interesting to note that Europe has not produced any of today’s big-name, disruptive tech leaders.

Throughout Asia, as in most of the rest of the world, a greater emphasis is also being placed on environmental, social and governance (ESG) issues, which can have a positive impact on shareholder value and returns. This trend should create attractive long-term returns for global investors, who are seeing ESG-related issues gain traction among corporate management teams, core shareholders and outside interests.

Investment implications

  • Good valuations, still-positive real interest rates and low sovereign leverage help Asia offer sound growth potential and market returns.
  • China’s “One Belt, One Road” initiative should boost foreign direct investment, while trade agreements such as the Regional Comprehensive Economic Partnership could provide additional support for intra-regional trade.
  • Thanks to their knowledge of the region, Asia’s BATs could become even larger than the United States’ FANGs.
  • Tension with North Korea could boost regional volatility in the shorter term, particularly if China brings insufficient pressure to bear and the US fails to reduce regional hostilities.
  • In the global hunt for income, many shorter-duration, higher-yielding issues in Asia look compelling (denominated both in US dollars and local currencies).
  • Investors should monitor the pace of structural reforms, particularly in China and India: They provide investors with strong signals about the potential for future returns.

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