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Where Next For Asian Growth?

question-markThe abrupt flight of capital from Asian markets in recent months would appear to suggest that the Eastern growth story may have run its course.

Almost as soon as Ben Bernanke announced in May that the US Federal Reserve would start to consider winding back its money-easing activities, investors began withdrawing funds from Asian markets. That not only triggered sharp falls in some Asian currencies such as the Malaysian ringgit, the Indonesian rupiah and the Indian rupee, but also sparked a drop in Asian stock markets too.

Sands of cheap money

It would seem, on the face of it at least, that the Asian growth story might have been built on the sands of cheap money created through Quantitative Easing in developed economies. So when the cost of money is likely to rise, it is perhaps understandable to assume that the decade-long Asian growth story might be drawing to a close too.

There is some tacit evidence to suggest that the market might be correct in its assumption. For instance, Thailand has slipped into recession and red flags have been raised over growth in India. The world’s tenth largest economy once boasted double-digit growth but that has slowed to just 4.5% between April and June, which is less than most economists had predicted.

However, it is important to bear in mind that Asia is a vast continent that comprises 49 separate countries.

Just as it would be wrong to tar the UK and Greece with the same economic brush, it would be just as wrong to put embattled Thailand and, say, successful Philippines into the same economic basket. In fact Philippines’ second-quarter growth of 7.5% was faster than expected. Additionally, China’s growth is expected to exceed 7.5% and Indonesia, which is the world’s fourth largest country by population, could grow around 6% this year.

China’s slowdown

Indonesia, of course, has some economic problems to resolve. It is importing more than it exports; inflation jumped to almost 8% in August; its current account is in the red and its currency has fallen sharply. That said, there are many developed economies that would gladly trade places with Indonesia right now.

Meanwhile, much has been made of China’s economic slowdown. But let us not forget that elephants don’t normally gallop and large economies don’t generally grow in the double digits.

We sometimes forget that China is the second largest economy in the world. Consequently, a 7.5% annual growth rate is hardly pedestrian. In fact, recent data appears to suggest that China’s objective to rebalance its economy from export-led to one that will be driven by consumers is showing early signs of success.

In the early days of Asia’s growth, investor found easy opportunities in the commodities sector as China and other Asian economies consumed minerals and metals to develop their infrastructure. That is likely to continue but probably at a reduced pace.

The next crop of opportunities is likely to come from growing demand from middle-class consumers. According to Ernst & Young, two-thirds of the world’s middle class will reside in Asia-Pacific by 2030.

Middle-class opportunities

The decade of growth in Asia has raised living standards and lifted the income of many consumers into what is generally called the middle class. This could be where investors might find interesting opportunities.

Investing in markets through Exchange Trade Funds such as DBX Philippines (SGX: N2E) and DBX Indonesia (SGX: KJ7) could provide exposure to a couple of Asia’s fastest-growing economies. However, this is likely to be broad-brushed exposure rather than a more targeted approach through, say, Lippo Malls Indonesia Retail Trust (SGX: D5IU) or Del Monte Pacific (SGX: D03).  

The Asia growth story is far from over. In fact it may only just be beginning. Many Asian countries should develop in the same way that the West developed after World War II. Manufacturing should gradually play less of a role in driving growth, while consumption and demand for services could become more important.

Investors may therefore find these areas more lucrative than hard commodities, which was last decade’s growth story. One way to participate in the continuing growth could be through Exchange Traded Funds that could provide a broad-brush investing approach.

A version of this article first appeared in the Independent on Sunday.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.