Asia's claim to the century remains strong
Stephen Bird believes wary investors are overlooking Asia's underlying strengths, which will see it dominate a world that is globalising, urbanising and digitising apace
Asia's corporate earnings are running some 20 per cent higher than their peak levels before the global financial crisis began; indeed, they are outperforming their US peers, which are running 12 per cent higher over the same period. Yet, Asia's stock markets are languishing 30 per cent below their pre-crisis levels, whereas the US stock market is actually up 1.5 per cent.
On a valuation basis, Asia appears to be trading at a significant discount. Valuations in Asia excluding Japan have been higher than now 72 per cent of the time in the past 39 years. In fact, 12-month returns have been positive 65 per cent of the time. Clearly, investors are fearful right now and may well be losing sight of the long-term fundamentals that are driving Asia and rebalancing the global economy.
Asia is, of course, attractive. Half of the world's population call Asia home and the strong growth of the past 20 years has seen Asia's share of the world economy double to 27 per cent. By the middle of this century we expect Asia, led by China and India, to account for close to half of the world's gross domestic product, with North America, Europe, the Middle East and Africa dropping from around two-thirds to nearly a third. By 2030, we are forecasting China and India to be the largest and third-largest economies in the world.
Investors appear to doubt whether Asia will succeed in achieving an economy that matches its share of world population. Yet it is exactly the higher expectations of this population that will continue to drive growth in this part of the world. The "genie" of an expectation of higher living standards has been let out of the bottle and cannot be put back in.
The defining trends of this century - namely globalisation, urbanisation and digitisation - are likely to continue to reshape the way we live, work, socialise and consume services. Already, more people have been lifted out of poverty by these trends than ever before in human experience. It is precisely the speed and scale of this progress, together with the pervasiveness of the internet, that has created such a direct comparison for those other members of society who have yet to benefit from these trends.
Firstly, globalisation. Asia now accounts for close to 10 per cent of the MSCI global index, a doubling in five years, and we think it will double again in the coming decade. Asian companies now account for 181 companies in the Fortune 500 and this region now accounts for over 40 per cent of all global trade, a doubling in the past decade. Asia's global share of corporate revenues has doubled to 25 per cent in the past 10 years.
The Boston Consulting Group's most recent survey of the top 100 "global challengers" from the emerging markets showed that 50 of the companies to watch with revenues over US$1 billion were from India and China. The region's share of global mergers and acquisitions is now 25 per cent - a tripling since the start of the century.
Asia's corporate champions are making a significant impact on the global financial and economic landscape. The common factors driving the expansion of these companies include the thirst to secure natural resources, an ambition to acquire leading-edge technology and an imperative to move up the value chain.
Secondly, urbanisation. About 30 per cent of the world's GDP is already concentrated in 150 cities - of which Asia accounts for close to a third and we will see several hundred million Chinese move to cities in the coming decades.
China's new president, Xi Jinping, says this next phase of urbanisation will be a major economic growth driver. China's cities will mature and develop the necessary services infrastructure to support the education, transport, health and retirement needs of its citizens, and this development will expand the consumer proportion of China's economy.
This century is already looking like one that will be dominated by the rise of the emerging-market consumer. Asia is home to a large and fast-growing affluent segment. China and India combined account for around 100 million households with income of over US$10,000 a year. This is expected to grow. By 2025, it is predicted that China will have 260 million middle-class households with higher expectations than any generation before them.
Citi estimates that, by 2020, three-quarters of incremental consumer spending will come from emerging markets. That same year, consumer spending in Asia is expected to overtake North America. Just a year ago, the number of people with assets of over US$100 million in Asia surpassed North America for the first time ever. China is also expected to be the world's largest credit card market by the end of the decade.
Perhaps the most pervasive trend, though, is digitisation. It has already transformed, and made redundant, many traditional business models, affecting everything from how we take pictures, buy music and movies, consume news, compare prices, shop and pay for services. It is changing banking forever.
Nearly 5 billion people are using mobile phones, with over 60 per cent in Asia. Consumers are increasingly paying for services via a combination of mobile devices and digital wallets. All companies need to "digitise or die".
As we look forward across this region, there are certain to be headwinds along the way, and these summer markets are testament to that. But Asia has learned lessons from its own crisis of the late 1990s. Relatively low personal debt levels and some of the lowest government debt-to-GDP levels in the world bode well for Asia's ability to cope with this turbulence and continue on its path to a greater share of the world economy.
Of course, investing when others are fearful takes courage and staying power, but the broad preponderance of evidence supports the view that the world will continue to move east and this century will indeed belong to Asia.
Stephen Bird is CEO for Citi in Asia Pacific