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Marco Fontana
Fund Manager of Eurizon Azioni Pacifico

The perspectives of domestic consumption in Asian emerging economies 

October 10th, 2010

In the last two decades some Asian economies have imposed themselves on the global scenario because of their extremely high economic growth rates.
The role of these countries will be determinant from now to the next years, since tendencies that will radically modify the current global macroeconomic picture are taking place within their borders.
When speaking of emerging Asian countries we mean China, India, Korea, Taiwan, Indonesia, Malaysia, Thailand and the Philippines.
Their growth, in the past and still today, has been driven by foreign demand.  Simplifying, we can say that the developed Western countries consume goods produced in Asia.
This development model is doomed to change deeply.
In the emerging Asian countries the growth perspectives of domestic demand appear to be stronger than those of foreign demand. This tendency is supported by numerous factors, both structural and cyclical.

The demographic factor is the main element: Asia is the area where the highest population increase will take place. In the last 15 years population growths have been relevant in India (+265 million people), China (+135 millions), Indonesia (+46 millions) and in the Philippines (+24 millions). The increases have been substantial also in relative terms: the population percentage growth has been above 20 % almost everywhere, with peaks of 41% in Malaysia, of 24% in Indonesia, of 29% in India and of 34% in the Philippines.

The phenomenon is also qualitative: the middle class in Asia is coming into existence and developing. The data of per capita GDP, for example, indicate that in the next ten years in the Asian region the number of people with a per capita GDP above 5 000 USD will rise from the current 470 millions to over 1.2 billions: an increase of about 700 million people, that will belong to the middle class and that, probably, will adopt consumption models closer to those of the Western middle class.
Urbanization represents another structural factor, that historically, has favored a strong increase in consumption. It is estimated that the ratio between urban population and total population will go from 34% in 2000 to 43% in 2015, up to 52% in 2030. In the Western world the number should remain constant at 80%.
Let’s examine now the cyclical factors, that is those linked to the present phase of the economic global cycle, which can strengthen or weaken the transition process under way.

 

Our opinion is that also cyclical elements will contribute to the determination of favorable conditions for the rebalancing of growth towards domestic consumption.
The 2008 financial crisis, in fact, has laid bare one of the great problems of Western economies: the excess of debit accumulated by the consumer, in particular in the Anglo Saxon countries. The gradual retract of this excess necessarily implies a significant reduction in the families’ consumption growth rates with respect to the experience of the past 50 years. Not only. The increase of the stock of public debt of the main Western countries will impose choices of restrictive fiscal policies in the next years. Therefore, not only the private consumer (families) but also the public operator will have to find a new equilibrium in terms of consumption on levels necessarily below with respect to the past.
Structural and cyclical factors push therefore in the same direction: in Asia, in a very near future, we will have more domestic demand and less foreign demand. It then becomes interesting to understand the effects of this transition and the modalities with which it will show itself.
For the vast majority of the emerging countries in the area the economy is based on the manufacturing sector, with a less relevant weight of the services sector. The future affirmation of domestic demand and consumptions will modify the present productive structure: the incidence of the secondary sector (the industrial sector) in favor of the tertiary one (that of services).
It is also important to try to understand how domestic demand and consumptions will manifest themselves, in order to identify potential investment ideas in the medium and long run.
The domestic demand will be stimulated by policies aimed at reducing the savings propensity (in Asia high on average): we will therefore assist at reforms aimed at creating a social protection network to reduce the economic uncertainty for the future, with the introduction of welfare, health and social security systems.
Another intervention area will be the currency policy. Asian currencies, in fact, will have to be left free to fluctuate; given the substantial credit surpluses in the trade balances, this will probably cause an appreciation. Stronger currencies will therefore allow Asian consumers to have a greater purchasing power.
Important reforms will also touch the labor market. Higher security standards, safer working conditions and greater specialization will allow to achieve higher wage levels, increasing the available income and therefore providing a further stimulus to consumption.
Financial services will also be an item of attention. These will increase in terms of quality and quantity to accompany the raising needs of Asian consumers. Supply of personal loans, consumer credit, mortgage loans, credit cards and insurance services will probably be at the core of this financial evolution. The growth and the development of the countries’ financial systems will go hand in hand.
Financial markets have already started to incorporate that a relevant part of Asia’s future growth will come from domestic demand. The process, though, is still in its early stage and it’s worthy of attention on the side of investors.

 

Source: Eurizon Capital SGR’s elaboration of data from:
www.mscibarra.com
datastream
www.clsa.com
www.economist.com
www.imf.org


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