Go East young man - why the future is in Asia

By Tom Stevenson, 26 June 2008

In his latest weekly column, Tom Stevenson looks through the prevailing gloom in developed markets to the long-term growth story in emerging Asia. Investors have a natural, if unhelpful, tendency to over-emphasise what’s happening in their own back yard today and pay insufficient attention to what the bigger global picture will be tomorrow. Awash in gloomy headlines about slowing growth and spiralling costs on both sides of the Atlantic, it is hardly surprising that investor sentiment is depressed.

A recent conference on investment opportunities in Asia provided a different and more positive insight. While it is true that Asia cannot be immune to the ongoing US slowdown, and while it faces a number of serious challenges such as rising inflation, the longer-term growth story remains in tact. The shift of economic power to emerging markets, and especially Asia, is an unstoppable force that investors ignore at their peril.

A growing region

According to the International Monetary Fund, growth in developing economies is forecast to be more than twice that of the developed world in each of the next five years⁽¹⁾. Emerging markets are expected to contribute almost three quarters of global GDP growth this decade⁽²⁾. The steady compounding of that superior growth rate over many years will transform the world’s economic landscape. 

The five largest economies in the world in 2007 were respectively the US, Japan, Germany, China and the UK, with America’s economic output more than three times that of its closest rival⁽³⁾. By 2050, Goldman Sachs predicts that the top five will comprise in descending order: China, India, the US, Brazil and Russia. India’s economy could be 40 times bigger by 2050⁽³⁾.

Clearly only an extremely long-term investor looks that far ahead, but such is the scale of the transformation over that period that even over much shorter periods the potential investment gains are likely to be significant. 

Compared to the over-indebted developed world, Asia’s balance sheet provides a rock-solid foundation for future growth. National savings across the region have more than doubled in the past five years⁽⁴⁾, while corporate debt levels have tumbled since Asia’s economic crisis of a decade ago⁽⁵⁾. As the region declared “never again” to the currency turmoil in 1997, it has built up an impressive buffer of foreign exchange reserves, worth almost $3trn last year⁽⁶⁾.

Asia is much less dependent on exports to the traditional consumer of last resort, America, than it was ten years ago. The US share of exports from Asia has fallen from 18.6% in March 2006 to just 3.1% in March 2008, while both Europe and commodity producing countries have increased their shares to 20% and 37% respectively⁽⁷⁾.

Stronger domestic consumer markets

Robust home-grown consumer markets have helped Asia shrug off the West’s credit crunch. In China, the number of households enjoying real incomes of more than $20,000 a year is expected to exceed 200m within the next 15 years⁽⁸⁾. That means an exponential rise in the numbers of people who can contemplate, for the first time, buying consumer goods and services.

Asia is also providing the impetus behind a rapid expansion in global infrastructure. Spending on roads, rail, water, hospitals and the like in emerging markets is forecast to treble over the next ten years with more than half the total spend earmarked for Asian countries⁽⁹⁾. As a result, Rio Tinto was able to negotiate a 96% price rise for iron ore this week⁽¹⁰⁾.

The whole agricultural supply chain from inputs like seed, fertilisers and pesticides to farmland, logistics, food manufacturing and retail is also being transformed by Asia’s rapidly changing eating habits. Between 1990 and 2005, it is estimated that Asia’s share of global meat consumption rose from 21% to 33%⁽¹¹⁾.

Caution required

This compelling growth story is not without its risks. Top of the list of concerns today is inflation. Rising food prices pose a seriously destabilising risk in countries where the cost of eating takes a greater share of household budgets. India’s central bank this week raised its key lending rate to its highest for six years as it battles to rein back inflation⁽¹²⁾.

Other concerns include inadequate infrastructure, lack of depth in some frontier markets and the risk of government intervention such as China’s recent increase in the cost of petrol.

But overall, these are prices that investors should be prepared to pay for a fantastic unfolding opportunity. The breadth of the Asian investment universe is increasing rapidly, with 286 of the 500 constituents of India’s Sensex index now valued at more than $500m⁽¹³⁾.

With regional price-earnings ratios little higher on average than those in developed markets, investors will hope to buy more growth for the same price⁽¹⁴⁾.

The link between GDP and stock market size is inexact. But with the Asia Pacific region accounting for 16% of world GDP but only 10% of the value of global stock markets, there is plainly some catching up to do(¹⁵⁾. It would be amazing if the region did not account for a considerably higher proportion of total market capitalisation in ten years time than it does today.

Under the shadow of falling house prices, rising fuel and food costs and an ongoing credit squeeze, it can be hard to lift your eyes to the sun rising over the eastern horizon. But that is exactly where many long-term investors are looking. 

Fidelity only gives information about its own products and services and does not provide investment advice based on individual circumstances. Reference in this document to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Investments in small and emerging markets can be more volatile than other overseas markets. For funds that invest in overseas markets, changes in currency exchange rates may affect the value of your investment. The value of investments can go down as well as up, so you may get back less than you invested. 

^{Sources:
(1) IMF, World Economic Outlook, April 2008
(2) IMF, World Economic Growth, October 2007
(3) Goldman Sachs, Global Economics Paper 169, June 16 2008
(4) Goldman Sachs, April 2008
(5) Worldscope, MSCI, Citigroup; Worldscope, Lehman Brothers, April 2008
(6) Lehman Brothers, April 2008
(7) CEIC, Morgan Stanley Research, March 2008
(8) Jing Ulrich, JP Morgan, April 2008
(9) Morgan Stanley, World Bank, GlobalInsight
(10) Financial Times, June 24 2008
(11) FAO, Morgan Stanley, February 2008
(12) Financial Times, June 25 2008
(13) Merrill Lynch, February 2008
(14) Exane, BNPP, 2008
(15) Datastream, February 2008}

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