In the wake of Donald Trump’s victory in the US presidential election, it looked very much as if Asia economic growth would be a notable casualty of his administration. Withdrawal from the Trans-Pacific Partnership, rhetoric on bringing jobs back to America and threats of import taxes on Asian goods seemed set to disrupt Asia’s long-term growth story.
This conclusion has proved flawed. Export markets have, if anything, proved reasonably robust since November of last year with the first quarter of 2017 showing strong growth (1.). Although many continue to predict a slowdown, the Trump effect has proved limited to date.
This may be because stronger global growth is negating the influence of any protectionism from the US. Equally, intra-regional trade is building and the US is a less important market for many Asian economies. Perhaps more importantly, domestic demand is becoming a far more exciting source of growth for many Asian economies.
To our mind, export markets have long since ceased to be the most dynamic part of Asian economies. Increasingly, this title has been taken by domestic growth stories. While the region cannot be completely immune from weakness in its export markets, this domestic consumer growth may give it more resilience than many believe.
The story of the Chinese consumer has been well-told. The Government is increasingly trying to shift the economy away from infrastructure and manufacturing-led growth, to more stable consumer led growth. In this, it is having some success. Retail sales are growing at around 10% per year (2.) with consumption contributing almost two-thirds of 2016 growth. Services now account for more than half the economy. This is creating new investment opportunities that simply don’t exist elsewhere. China’s 1.36m population provides an out-sized growth opportunity for any company.
However, many of the best opportunities in China have been widely discovered by investors, and prices are now relatively high. Nevertheless, there is a similar phenomenon going on to a greater or lesser extent across many Asian countries, creating compelling opportunities across a variety of sectors in the region.
One example would be India. The future for the Indian consumer is bright. A recent Goldman Sachs report said: “With a young, tech-savvy population, improved education and rapid growth, India is creating a consumer market deeply tied into mobility and connectivity.” (3.) The country has been a fertile source of many good ideas for the Edinburgh Dragon trust. The Trust currently has 11 stocks in India, of which nine are predicated on the growth in domestic consumption.
Among the companies benefiting from the emergence of this young and dynamic consumer are Hero MotoCorp, the world’s largest manufacturer of two-wheeler bikes. It has a huge network, and speaks to the Indian consumers’ desire for brands that offer value and quality.
The growth in financial services is a phenomenon across much of emerging Asia. Those who are newly wealthy need bank accounts and insurance products, progressing to home loans. In the portfolio, we hold Housing Development Finance, one of the largest providers of housing loans in India, financing around 4.4 million housing units per year. The group also provides life insurance and general insurance.
A similar picture is seen in countries such as Indonesia, Thailand and Malaysia. In each case, the pattern of domestic consumption will be different and needs to be considered carefully. For example, in Indonesia, five million people are entering the urban consuming classes every year (4.). However, the fragmented geography of the country means that consumer spending patterns can be diverse.
It is also worth considering the extent to which this domestic consumption boom will be exploited by non-domestic companies. Certainly, there are specific examples – Starbucks most recent report showed China/Asia-Pacific growth of 18% year on year (5.). However, there have also been conspicuous failures – Amazon’s early forays into China, for example.
Domestic companies are often in a better position to understand local dynamics. As such, those international companies that have succeeded have often done with local franchises: Hindustan Unilever, for example, is a holding in the portfolio. This may be a listed subsidiary of Unilever, but it is run on local lines. We also hold Unilever Indonesia, which has learned to navigate the country’s unique geographic make-up.
It will also depend on the sector. In banking and finance, for example, companies need local licensing and they need authorities to sign off on the capital base. This is often far easier for domestic players than foreign players.
On balance, from fast-moving consumer goods to tobacco, to motorbikes, to financial products, there is a wealth of companies benefiting from the growth in domestic demand. We have positioned our portfolio to make sure our investors benefit as well.