Asian consumption will survive

Consumption in Asia remains a brightening opportunity for investors seeking growth in spite of recent market volatility and uncertainty.

Asian markets may have struggled last year but the near-term future looks bright as company earnings tick up and policy in the region loosens as inflation eases.

However, it is the longer-term picture that is even more exciting as ‘old Asia’ and its reliance on heavy industry and exports fades away. ‘New Asia’ is about greater consumption, more efficient companies, rising demand for financial and value-added services. The evolution of intra-Asian trading blocks is another foundation driving Asian growth in the next decade. All of this adds up to create an exciting profile for the region, particularly for investors seeking growth.

Consumption is developing as the workforce expands, education improves, urbanisation increases and, as a result, productivity grows. This in turn is boosting the number of Chinese residents classed as middle-income, as their larger disposable incomes increase their spending power.

In 2010, roughly 600m people in Asia were defined as middle-income, or had an income of at least $10,000 (£6,400). By 2015 there will be more than 1bn falling into that category. Today consumer spending amounts to some $8trn and it is quite conceivable that by 2020 this could double to $16trn.

With such a change in spending comes a shift in consumption patterns. Developed nations, such as the US, spend far less on food (7 per cent) and more on leisure and travel (26 per cent), healthcare (19 per cent) and housing. In China, the largest proportion of income is still spent on living essentials, with 33 per cent spent on food and 10 per cent on leisure and travel.

This is not just a China story. Nominal discretionary spending is increasing in countries such as Indonesia, Philippines, Thailand, Malaysia and Singapore. In fact, Indonesia, India and the Philippines have the strongest labour workforce growth profile in the next decade. This is where we are likely to see the biggest upside in urbanisation and education.

Given the obvious opportunities for growth, many investors will be asking whether now is a good time to invest for growth in Asia. From the perspective of valuations as well as fundamentals, the answer is yes. Historically, Asian companies have traded roughly 1.5 times the value of their net tangible assets – their book value – falling to one times book during the Asian crisis and hitting a peak of three times at the end of 2007. Today as company earnings continue to surprise they look even more convincing.

Investors have shied away from Asia over fears of European contagion as well as the impact of high inflation throughout the region. As inflation has eased, policy is becoming looser and more supportive for economic expansion. India remains an exception to this trend as a result of a slowdown in its political reforms as well as its continued fragility and vulnerability to fears over the global financial system and higher commodity prices.