Investors dream of the profits to be made from billions of emerging-market consumers, but first these countries will need to become wealthier. That’s more of a challenge than it sounds, says Cris Sholto Heaton.
The week marks the start of the Year of the Pig in the Chinese zodiac. Pigs symbolise prosperity and good fortune – but there’s little good news coming out of Asia at present. China’s economy is slowing abruptly; the government last week began recapitalising banks in an effort to get them to lend more and support consumption. The outcome of India’s general election in May is highly uncertain, increasing the risk of erratic policymaking as the ruling party tries to shore up support. Other major economies are also weakening: South Korea expanded at the slowest rate in six years in 2018.
Some data still looks encouraging: GDP growth of 6.2% in the Philippines is not to be sniffed at. Yet even that represents a slowdown. The general trend across the region is clear and since the wider global economy looks wobbly – even ignoring the risk that the trade dispute between China and the US spirals into a full-on trade war – we must assume it will get worse.
Investors in emerging Asia have done pretty well over the past decade since the global financial crisis. The MSCI Asia ex-Japan index has returned an average of 11.8% per year in US dollar terms, slightly better than the MSCI World index of developed markets. And yet Asia still looks better value: the MSCI Asia ex-Japan trades on a price/earnings (p/e) ratio of about 12.5, compared with about 16.5 for the MSCI World. The question is whether we can expect these kinds of gains to resume once we get past any global slowdown – or whether they are the ephemeral result of a world awash in liquidity. To answer that, we need to reflect on why investors tend to get excited about Asian economies in the first place.
The greatest growth story in history
What makes Asia different to other emerging markets is its record of rapid and transformative growth. All the outstanding development success stories of the post-war era have been in the region. Back in 1960, Japan had a GDP per capita of $480, according to World Bank data. Brazil was on $210 and South Africa on $430, to take two benchmarks for other emerging regions. By 2017, Japan’s GDP per capita had grown to more than $38,800, while Brazil stood at just $9,800 and South Africa at $6,150.
Japan may seem like an unfair standard to choose: after all, it already had an industrial economy prior to World War II, so its post-war recovery and boom was in some respects a case of reconstruction rather than development (although its economy became far broader, more sophisticated and outward-looking). However, this certainly wasn’t the case for South Korea, which grew from a GDP per capita of $160 to $29,750 – higher than European economies such as Greece and Portugal. Taiwan did almost as well. Although both are still classified as emerging markets by MSCI, that is because of some minor restrictions on access for foreign investors, rather than development – both are sophisticated, technologically advanced economies. More recently, China has grown to be a major economic power. While it is not yet a rich economy overall and some parts of the country remain very poor, the development of eastern provinces and especially its major cities is far more advanced than a national GDP per capita of $8,800 suggests.
“All the outstanding success stories of the post-war era have been in Asia”
But not all Asian economies have been quite so successful. In 1960, the second-wealthiest country in the region was the Philippines, an economy that has clearly failed to keep pace with its peers. The same is true of others such as Indonesia, Malaysia and Thailand – all have had periods of rapid growth, but have not yet become advanced, wealthy economies.
Optimists see this as an opportunity. Given enough time, these economies are likely to follow in the tracks of Japan, South Korea, Taiwan and China. This should lead to rapid growth in the number of people with disposable income, hugely boosting consumption: some 3.5 billion people in Asia will be classified as middle class by 2030 and will account for 50% of global middle-class consumption, according to a projection by the Brookings Institution, a US think tank. Yet that outcome is by no means certain.
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