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Point of View

The rise of the Asian consumer

Matthew Brittain, Investment Analyst 
 

At Sanlam we are excited about the long term prospects for Asia. We believe that the rise of the Chinese consumer is a trend that will continue to drive growth throughout the region for years to come. We know its going to be a bumpy ride, after all it is still an emerging market with many challenges, but over time we expect the region to account for a disproportionately large slice of global growth and this creates exciting investing opportunities.

China is well known as the world’s workshop, and the phenomenal growth in this sector has supported the economic transformation we have witnessed in China over the past few decades. What is less well known, but can clearly be seen in the chart below, is the fact that growth in the tertiary, or services, slice of the economy has been even faster than the manufacturing engine room. Recently, the government has emphasised the importance of developing this internal consumption part of their economy to reduce China’s dependence on exports to the rest of the world. Consequently, there has been an acceleration in domestic Chinese consumption and we think that this momentum will remain in place, supporting the prospects for companies that service this trend.

Breakdown of China’s GDP – what percentage of GDP does each sector represent



SOURCE: Bloomberg

Also, the countries around China are well positioned to benefit as China continues to evolve its own economy and the domestic demand for goods drives regional trade. As the quality of China’s manufacturing moves up the value chain, leading to higher wages, other Asian economies have benefited as they have become more competitive and able to compete for less complex manufacturing jobs. These trends are well established and are likely to continue over the coming decades.

Here are some of the other exciting reasons we think that the China consumption trend remains well in place:

  • Over 100 cities in China have a population of more than a million people and yet only 56% of the population lives in cities. Estimates by Mckinsey are that by 2020 and 2030 this number will be 60% and 70% respectively. If that comes true, nearly 200 million people are set to urbanise in the coming 13 years.
  • Education is improving. In 2004 China had eight universities ranked globally in the top 500, that number is now 28 and set to move above 50 in the coming years. There has also been massive growth in the percentage of population enrolling for bachelors degrees (from basically 0% in 1980 to 3% in 2000 to over 10% now). Similarly all of Asia has record university enrolment.
  • Many western economies have legacy infrastructure and institutions, whereas China and other emerging markets have much more of a blank slate. This means they can take advantage of the latest technology and build a more efficient and modern country.
  • China has the highest savings rate in the world allowing businesses and governments to borrow money to invest in growth. 

We have perhaps focused more on the positive side of the Chinese economy but there are some major concerns as well. Markets are most worried about the amount of debt in the economy, in particular that there has been a large amount of money borrowed by inefficient state owned companies and local governments. The concern is that these zombie companies are unable to repay the debt or that too much money has been spent on infrastructure that is not adding real value. We agree that this is a long term concern but we feel that the problem is well understood and is being addressed. What we are even more worried about is that with so much government intervention there are some serious imbalances in the economy – some of which we may not even be aware of.

Summary


Even if growth in China continues to drift lower over the coming years we still think it will be enough to bulldoze through the issues. In particular we believe that the Chinese consumer story still has enormous capacity to extend further as the population strives for their own version of the “American Dream”, and this will support investments that cater to this evolution.
 

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.