Asia’s growing middle classes bring about more pulling together, than pushing against

HSBC says various sectors are enjoying region’s strengthening interconnectedness — but worryingly, defence is included on the list

PUBLISHED : Thursday, 30 June, 2016, 3:10pm
UPDATED : Thursday, 30 June, 2016, 10:51pm

Companies that can benefit from the growing interconnectedness between consumers across Asia’s burgeoning so-called middle classes look like good picks for investors, says HSBC.

A report from HSBC setting out ten equity themes for the coming decade, highlights the impact of the links between East Asian nations and their consumers as being a major underlying driver for growth in a number of sectors in the coming years.

The rapid growth in per capita incomes and urbanisation across east Asia in recent decades had led to significant growth in the spending power of the region’s new middle classes.

And in turn, this has resulted in increased demand for consumer products and other conveniences.

This growth was, in part, a result of greater integration between the economies of different countries in the region, but has also contributed to further shared interests, which, the HSBC report says, are providing new opportunities for companies and those invested in them.

One example cited in the report is the Korean cultural wave known as Hallyu.

The Korean television drama, Descendants of the Sun, was streamed more than 2.3 billion times by Chinese fans in April, and this, the report said, had helped drive revenue for internet companies, travel to Korea and boosted retail sales, particularly for the country’s cosmetics, and even its cosmetic surgeons.

When it comes to consuming media, the greater range of interests audiences have, especially in content from overseas, the less they can rely on traditional media to provide access to them.

Chinese consumers have traditionally shunned paying to view content online and providers such as Youku and Baidu have offered content for free earning revenue through selling advertising, while pirated music television and films are widely available.

Tencent estimates that subscription revenue in China now accounts for 25 per cent of the online video market, up from just five per cent two years ago.

“This offers growth opportunities for online portals (e.g. Baidu in China, but also Naver in Korea), as well as content providers,” said the HSBC report.

Online services are also playing a major role in travel within Asia, itself a further sign of the growing cultural linkage between the region’s middle classes.

Online travel agents (OTAs) in China, such as Ctrip and Qunar (who announced a merger last year), have been some of the main beneficiaries of this, said the report, which added that OTAs were also looking to invest in overseas markets.

Nations also have an interest in securing supply chains ... As such, geopolitics and diplomacy became increasingly important and a reason why defence spending started to rise across the region
HSBC report

Ctrip announced in January that it had bought a stake in India’s leading travel portal MakeMyTrip, for example.

On a geopolitical level, however, the HSBC report found that the strengthening links between countries in the region was having another, altogether more worrying opposite effect, though one that again provided opportunities for some companies and investors.

“The sourcing of raw materials or intermediate products from multiple geographies across the globe means that supply chains have become increasingly global.

“However, nations also have an interest in securing supply chains ... As such, geopolitics and diplomacy became increasingly important and a reason why defence spending started to rise across the region,” said the HSBC report.

According to SIPRI (the Stockholm International Peace Research Institute), Asia’s total defence

spending has increased 75 per cent over the last decade.

“While China’s expansion in defence spending over the period has been dramatic (an increase to an estimated US$215bn from US$80bn), nearly all countries across the region have seen substantial increases in military spending over the period,” said the HSBC report, which said that India was stepping up its modernisation efforts in this area.

The HSBC report said that stocks potentially of interest to investors in this sector included Chinese shipbuilding giants China Shipbuilding Industry Corporation and China State Shipbuilding Corporation, Indian conglomerate Larsen & Toubro, and Korea’s Hanwha Techwin.