Wages and consumption to underpin growth in Asia

Robert Horrocks, chief investment officer of Matthews Asia, said that following a decade of brisk growth the ‘real’ growth rate across Asia appears to be slowing to 4 to 5%.

 

“However I suspect that this is just the beginning of a vast consumption growth story,” said Horrocks.

 

“The greatest acceleration has historically happened at a GDP per capita level of $5,000 to $15,000 and many Asian economies have now reached this ‘sweet spot’. These countries have now reached the level of economic growth comparable to Japan in the period between 1960 and 1980, when its consumption blossomed.”

Market sentiment in Asia appears to be improving, in Horrocks’ view, albeit with one cautious eye on the timing and impact of quantitative easing tapering in the US.  In the very near term, investor interest may continue to focus on developed equity markets, but he expects more positive news flow from China to give upward impetus to Asian markets during 2014. The long-anticipated return to equities may come to fruition once tapering begins and interest rates start to rise in a meaningful fashion.

What is not being considered as much by the markets is the possibility that growth in developed markets could disappoint, said Horrocks.

 

“Currently, the US and Europe look vulnerable because they are relatively expensive.  Asia's price-to-earnings ratio on the other hand looks cheap compared to long run averages and compared to the developed world. So, although there are some headwinds for next year, domestic companies in Asia still should enjoy a reasonable operating environment.”

“The driver of domestic consumption is rapid wage growth,” Horrocks continued. “Japanese consumers in the 1960s continued to upgrade their consumer ‘wish list’ as their wages climbed by double digits every year. With the exception of developed Asia, wages today in many Asian countries are also rising by double digits. This is a good reason to get excited about the future of Asian consumers. We expect both the consumer staples and consumer discretionary sectors to perform well over the medium term, especially those with exposure to emerging Asian economies.”