Asia is evolving into a front-line destination for international investors.
Its appeal lies in its long-term economic growth, the gradual development of the services sectors and first-rate companies to service increasing domestic household wealth and the diversification qualities that largely shielded the region from the post-2008 world-wide recession.
Although annual economic growth rates have slowed recently, its nature has changed significantly during the past 10-to-15 years. Previously, corporate Asia exported primary and secondary goods to the rest of the world, now it focuses on meeting domestic demand for high-value manufactured products and sophisticated services.
Real GDP growth in India and ASEAN outpaces global growth
Source: IMF, World Economic Outlook, February 2016
Growth of average real wages in Asia-Pacific and the world
Source: ILO: Global Wage Database 2014/2015, based on national statistics
Several governments have also implemented important structural reforms to boost their countries’ business environment, such as decreasing bureaucratic delays, improving governance, removing barriers-to-entry and encouraging innovation. Better bank supervision and more vibrant local capital markets have also helped lower the cost of doing business.
Notable examples include initiatives to enhance corporate governance in Japan and South Korea that should encourage the growth of small- and medium-sized enterprises and on-going measures in India and Indonesia to reduce administrative obstacles. Meanwhile, China has introduced supply-side reforms to facilitate its shift to a consumer-based society from an export- and investment-led economic model.
However, Matthews Asia believes that these trends are partially reflected in share price valuations which are about in line with their historical average and predicated on conservative earnings forecasts. That said, investors need to take a long-term view with investments in Asia.
Rise in household wealth
Certainly, there are risks. Policy missteps by central banks might undermine progress, and this year’s strong foreign portfolio flows into Asia’s markets could reverse. In addition, China must eventually wean its state-owned enterprises off its reliance on debt financing.
Although these concerns are valid, we believe they are out-weighed by the trend towards higher household wealth throughout the region. It has been driven by productivity gains during several decades and has only once been delayed — in the immediate wake of the 1997/8 Asian financial crisis.
According to the OECD, Asia’s consumers now make-up more than one-third of middle class expenditure worldwide. And as disposable income levels rise, people’s spending and saving habits change.
In the region’s richer countries, including China, the consumer discretionary sector benefits as households spend more on electronic appliances, entertainment and tourism. The healthcare sector is boosted by demand for treatment for more complicated (Western-type) diseases and the banking and insurance sector is developing with the application of new technologies to meet requirements for wealth planning. Meanwhile, consumer staples remain core to poorer nations in the region where demand will continue to grow as they become more affluent.
Investors should be mindful of valuations, but we believe the case for long-term investing in well-managed Asian companies with earnings growth potential remains strong.
Sharat Shroff is a portfolio manager at Matthews Asia
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