How attractive is Asia?

Is the promise of the Far East worth pursuing? David Lee looks at the drivers to consider

Asignificant body of evidence points to Asia as a great place to invest, but markets have not yet captured the growth promise of the Far East. That was the view of Andrew Graham, head of Asia for Martin Currie, who said he had visited a large number of UK wealth managers over recent weeks and found they only had 5 to 6 per cent of their funds invested in Asian markets.

Graham posed the question “should we keep existing funds in Asia and should we put more into Asia?” – and provided evidence to deliver an emphatic yes.

Asian markets are delivering growth three times that of the developed world and that is predicted to continue – and valuations are “reasonable and attractive relative to the rest of the world”.

Asia, excluding Japan, has 20-year annualised growth of 10 per cent and this is predicted to remain at a similar level (9 per cent) to 2020.

Graham noted four key drivers of economic growth in Asia: n Increasing consumption driven by rising wealth and consumer spending; n A wide range of world-class tech companies; n Infrastructure growth driven largely by increasing urbanisation; n Increasing inter-regional trade, which has benefited from the reduction and removal of tariffs.

“Asia’s biggest trading partner is now itself,” said Graham.

“The middle class has grown substantially and is still growing – and this is where the action happens in terms of consumption.”

[In the next 20 years, 88 per cent of 1 billion people entering the global middle class will be from Asia].

Much consumer spending growth in Asia is happening online, through portals like China’s massive e-commerce business, Alibaba, now with a market cap of $500bn-plus.

Alibaba has helped turn China’s Singles Day into an online trading phenomenon, worth more than $25bn alone on 11 November, 2017.

By comparison, just under $5bn was spent on Thanksgiving/black Friday in the United States last November.

China has not yet made it into the index of the world’s most innovative countries but this will change.

China filed 1.34 million patents in 2016 (the last year when figures are available), way ahead of secondplaced

Chinese workers prepare boxes for delivery during the Singles Day online shopping festival. US with just over 600,000.

Far more STEM graduates are coming out of China than anywhere else – China has 4.6m STEM graduates, with 2.6m in India and 568,000 in the US.

In addition, the percentage of digitally active people using fintech services is very high in Asia, driven by a high level of digital “first interactions” with financial services in Asia.

Graham stressed that the rapid growth leading to investment opportunities was not limited to China and India.

He highlighted the Association of South East Asian Nations (ASEAN) – dominated by Indonesia, Malaysia, Philippines, Singapore and Thailand – which has formed an effective 10-country trade bloc and is now the world’s sixth largest economy with 8 per cent of the global population.

“ASEAN is often overlooked, but it has made strong progress and worked hard to reduce trade barriers,” he said.

“It has now eliminated tariffs on 90 per cent of traded goods with China.”

However, market indices have failed to match economic growth in Asia – International Monetary Fund (IMF) world economic outlook figures show 10-year annualised GDP growth in Asia (excluding Japan) of 9 per cent to the end of 2017, against market growth of just 4 per cent.

Graham said there had been poor capital allocations to these markets, but added: “Past performance is not a guide to future returns and attractive valuations enhance the investment case.”

He outlines Martin Currie’s unconstrained approach to investment in his article on this page. n