Emerging Asia and the rise of the consumer

Matthew Dobbs, Fund Manager, Asia ex Japan Equities

February 2013
Its well-established that Asias emerging economies offer significant growth potential in a world where interest rates have been at all-time lows. Furthermore, contrast the Wests anaemic economic growth with that of Asias dynamic and fast -growing economies and its clear where the long-term potential is. And thats exactly where the focus should be on the long-term. Asias markets are still prone to the vicissitudes of mone tary and fiscal policy in the US and Europe even as their growth is becoming more independent. The emergence of the Asian consumer has given the region extra optimism in an increasingly uncertain world. Chinas economic heft is widely documented, as is its muchneeded transition towards an economy that relies more on domestic consumer spending rather than investment.
Matthew Dobbs

However, there are also a host of other economies that are leading the way forward in this respect. The Association of Southeast Asian Nations (ASEAN) is a group of emerging nations including Thailand, Indonesia and the Philippines that boasts a combined population of nearly 600 million people. Our own approach to the region is relatively unconstrained and flexible, in order to adapt to where we see opportunities arising, from Sri Lanka to the Philippines. As a percentage of US consumption, the region has been steadily growing for over a decade (see chart 1). In our view, there are a number of sectors that can benefit from this rising consumer trend, with consumer staples and discretionary goods companies providing all the accoutrements of a more affluent lifestyle from cars to electronics.

Our own approach to the region is relatively unconstrained and flexible, in order to adapt to where we see opportunities arising, from Sri Lanka to the Philippines.
Chart 1: Asia ex Japan private consumption as % of US private consumption

Source: CLSA Asia Pacific Markets, Updated January 2013

Talking Point Emerging Asia and the rise of the consumer

Furthermore, unlike developed countries in the West, Asian households are renowned for high savings rates and have relatively little debt as a percentage of GDP (see chart 2). As credit availability grows, this will support the upward trajectory that we are continuing to see in consumer spending. Banks within the region are, on the whole, relatively well-capitalised, in line with a broader conservative approach to lending. Chart 2: Household Debt to GDP across Asia

Source: CEIC, Haver, Morgan Stanley, September 2012 * Q1 2012 data for Euro Area, Korea, US and UK, F2011 data for India

Having said that, we do have reservations on the quality of credit in China and retain relatively less exposure to it in our portfolios. The economy increasingly relies on high credit growth both within and (more troublingly) outside the formal banking system. This credit is increasingly used to fund large government projects, which are of questionable viability. Although growth in China still mainly derives from capital-intensive investment, there is a real debate among the leadership on how to reform the economy. Should this be achieved over the long-term, the investment opportunities will be seen in areas such as value-added manufacturing, consumer services, healthcare, media, technology and specialist finance. In addition, governments in Asia have room to use monetary and fiscal policy to respond to any short-term volatility in markets (see chart 3). There will not be a repeat of Chinas massive 2009 stimulus, but the tra ditional fiscal discipline that many associate with Asian nations is an attribute that allows for flexibility in times of uncertainty. Indeed, already this year we have seen governments implement minimum wage hikes in countries such as Thailand and Indonesia, which should support domestic consumption going forward. Rising wages in China have also seen its population garner more spending power. Chart 3: Some countries have fiscal room to respond

Source: CEIC, Morgan Stanley Research, January 2013

Talking Point Emerging Asia and the rise of the consumer

Despite all the favourable demographics and considerable progress of the Asian consumer as a source of potential returns, investing in the right companies is crucial. We maintain a strict adherence to bottom-up stockpicking, and favour companies that have strong corporate governance and shareholder-focused management. Combined with our own in-house due diligence and research to establish this, we also look for other factors such as robust balance sheets, cash flows and long-term growth prospects. Companies where shareholder interests are compromised are ones we tend to be wary of, along with companies confronted by excessive regulation, price controls or an overbearing shareholder. Overall, the region offers the disciplined investor a myriad of opportunities. A flexible approach to seek out undervalued markets means we are able to invest where we see the greatest potential for growth and long-term returns. With over half the worlds population and nearly a third of its economic output, the regions investmen t case remains as strong as ever.

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