The rise of Asia over the past four decades has been a story of stunning economic growth. It’s a rise that many predicted would progress to global leadership in the 21st century.
After getting through numerous stress-tests – the latest COVID-19 – the region is on the cusp of the long-anticipated century of economic leadership.
China was initially the epicentre of the COVID-19 crisis. The virus devastating to the whole Asia region. Much like stockmarkets around the world, Asian markets have experienced a rapid recovery following the initial shock. But what’s most impressive is the broader economic health of the region.
Unlike the aftermath of the Global Financial Crisis (GFC), when government debt in the region exploded, policymakers have approached the COVID-19 recovery phase with far less aggressive fiscal and monetary stimulus.
In 2020, money supply (this is money printed) increased by almost 80% in the US. But amongst the major Asian economies, the contrast is stark. In China the increase was only around 10%, India 20% and South Korea around 30%. This is illustrated in Chart 1.
Despite fiscal and monetary stimulus being reined in, recent economic data out of Asia is strong. Without the excessive monetary support seen in other parts of the world the private sector is prospering in the wake of the virus.
In China, gross domestic product (GDP) grew by 6.5% in Q4 2020. For the 2020 calendar year, China actually registered positive GDP growth. One of the few economies in the world to do so. This would suggest the Asian Development Bank’s forecast that Asia’s share of global GDP will surpass 50% by 2050, remains unencumbered.
To gain exposure to Asia’s continued growth we see opportunities within five key structural themes:
COVID-19 has provided a boost to many digital businesses, but we think there remains a long runway for growth in Asia.
When you look at the penetration of advertising spend as a percentage of GDP in China, it’s still a long way behind Western markets. As brands continue to opt for the digital advertising format, we think the market will grow at over 20% per annum over the next five-to-six-year period, catching up to the US by the end half of the decade.
There’s a major opportunity for investors in companies exposed to this across the Asia region. Our portfolio holdings include Meituan Dianping, Tencent and JD.com.
Much positivity on the outlook for Asia surrounds the ballooning middle-class population as people move from poorer rural areas to become city dwellers. Nowhere is this more evident than in China, where domestic consumption has emerged as the engine of economic growth, becoming a larger part of overall GDP year-on-year since 2015.
Major structural reform in India is also expected to significantly boost productivity in a nation where household debt to GDP levels are amongst the lowest in the world.
By 2030, China, India and Indonesia are expected to dominate global consumer spending.
Cyclical businesses such as those within the financials sector, can provide investors strong exposure. Examples of opportunities include HDFC Bank in India (one in every three credit cards that an Indian has is with HDFC) and China Merchants Bank which offers a range of financial services throughout China.
With so much focus on Asian middle-class consumption, many investors often ignore the premium consumer. China‘s ‘premium class’ has a population pool of around 340 million – the same size as the US. With income per capita of around US$16,000 ($20,630) per annum, this Chinese consumer class is growing at a compound annual growth rate of 15%.
We find defensive investment opportunities in businesses aligned to both the premium class and middle class. At one end, premium alcohol producer Wuliangye provides defensive exposure to premium consumption, while Yum China which owns leading Chinese quick service brands such as Pizza Hut and KFC, provides broader defensive consumption exposure.
CONNECTIVITY AND COMPUTE
While Asia was traditionally associated with low-tech manufacturing, this has transformed in many parts to leadership in high-tech manufacturing – supporting not just the major Asian economies but promoting regional interdependence too. The global market for leading-edge semiconductor manufacturing is dominated by Taiwan Semiconductor Manufacturing Company (TSMC) (Taiwan) and SK Hynix (South Korea).
As technology and data consumption continues to advance, we think manufacturing sales of semiconductors can rise from US$40 billion today to above US$120 billion in 2030 – a tripling of the market size. Given the extraordinary barriers to entry in leading-edge semiconductor manufacturing, TSMC will continue to dominate.
From an Asian investing point of view, decarbonisation means two things: greening of the electricity grid and the electrification of vehicles.
China’s immediate focus is on reducing city-based pollution which means increasing usage of electric vehicles. In November 2020, China announced New Energy Vehicles should account for 20% of vehicle sales by 2025. Whilst this target was reduced from an original 25% it is still significant. China is the largest auto market globally, with more than 21 million new car sales p.a. With its target of 20%, China is looking to become the global leader in electric vehicles (EVs) and could account for as much as 40% of total global EV sales in 2025.
Additionally, solar has become increasingly competitive across Asia as the all-in cost of solar greenfield capacity has approached that of coal without any subsidies.
One of our holdings, South Korean-based LG Chem is the largest manufacturer of EV grade batteries in the world. We think investors can also get exposure to this key theme by looking closer to home. Copper producers such as Oz Minerals are likely to benefit from ongoing requirements for copper for both the greening of the grid and vehicle electrification.
DIVERSITY IS KEY
Those wanting exposure to the Asian Century should ensure they do so through a diverse portfolio of Asian equities. By investing across these five key themes, we believe investors achieve not only strong diversity but exposure to uncorrelated growth areas.
The Asian Century is no longer imagined, it’s here today and investors should ensure they’re part of the action.
Sunny Bangia is portfolio manager of the Antipodes Asia fund.