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If you had invested in a broad emerging markets basket in the Eighties and Nineties you would have lost cash – or at best had paltry returns. But if you had chosen to concentrate on Asian equities you would have done better, as their economies strengthened so did a number of corporates.
In the decade from 2003 emerging markets moved as one, buoyed by the commodities boom and strong developed market spending dragging export companies higher. These drivers have since disappeared, and it is the Asian innovators that are best positioned to profit in the future.
“A strong manufacturing base has been important in the past,” said Baillie Gifford Pacific fund manager Roderick Snell. “Exports mattered a lot, but the growth in Asia is sustainable beyond that dependence on commodities.”
China is a key example of a country trying to distance itself from the financial model of the past. In 2000, China was responsible for 15% of the global consumption of copper and iron ore. By 2008 this had grown to 60%.
Moving from an economy driven by investment it wants to emulate the Western model of consumer growth. This move will not be without hiccups – earlier this year China experienced its first corporate bond default – but these measures are necessary if the economy is to be self-sustainable.
And the region has the resources to pull it off. No longer are commodities the most important resource in emerging economies; instead governments want to harness people power. In 2000 Europe was responsible for 40% of global middle class consumption, while the Asia Pacific region made up 20%. By 2050 this is forecast to have dramatically shifted, with Europeans making up less than 15% and the Asian middle classes nearly 70%.
The opportunities that this presents to investors are not new. The growing middle class in emerging markets has been a key theme for fund managers ever since commodity prices fell off post the global recession. Consumer staple stocks in the region have already largely priced in the spending power of the middle classes and political push to get these urbanised masses parting with cash. But within the innovation space Asia is a world leader, and this story is not as well told.
The recent record breaking IPO of e-commerce company Alibaba (BABA) is just one example. Companies such as internet provider Tencent (00700) and Amazon-like JD.com (JD) which is listed on Nasdaq have more cash going through them daily than any of their US peers. And this is despite a generally low market penetration.
Asia is investing more in innovation that Europe as a region – and matching the cash that North America is injecting.
“North Asia has led the way when it comes to innovation, and the rest of the region will follow,” says Snell. “These countries have been early adopters of technology – 4G in Taiwan, bypassing fixed line internet in India, e-commerce in China – and it is these companies that present the best investment opportunities.”
