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Asia-Pacific

The Evolving Face of Asia

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In the midst of slow and steady global economic growth, Emerging Market (EM) Asian economies are ascending.

 

EM Asia remains the only region to consistently grown its share of world output (quantity of goods or services produced) during the past four decades. In 1980, EM Asia contributing less than a tenth of global output, represents nearly one third today.

 

Citi analysts believe this trend could continue. By 2023, EM Asia could account for nearly 40% of world output (see chart 1).

 

 

With the largest population of any continent, the United Nations forecasts that the Asia’s population could swell from 4.5bn to 5.1bn by 2040. Importantly, EM Asia’s middle class looks to be on the verge of unprecedented growth.

 

Currently 1.9bn people in the region are defined as middle class with households annual incomes of between US$14,600 and US$146,000. By 2030, the region’s middle class population is set to rise to 3.5bn.

 

This would represent nearly 90% of the growth among the world’s middle class (see chart 2).

 

 

EM Asia Urbanization

With just under half of EM Asia’s inhabitants currently urban dwellers, compared to more than four-fifths of North Americans, Asia’s urbanization is on the move. By 2030, five of the six world cities with more than 20 million population are projected to be in EM Asia. By 2050, an additional 1.2bn people may live in cities across the region.

 

EM Asian urbanization could create numerous economic benefits. The necessary upgrades to infrastructure – housing, utilities, and warehousing – to accommodate the urban population could itself be an important driver of growth.

 

The transition of people from rural areas to cities could also drive productivity increases as well as real wage growth, boosting consumer spending. Citi analysts believe India and Indonesia could be key beneficiaries of urbanization.

 

EM Asia Innovation

As the global digital revolution continues, Citi analysts believe that parts of EM Asia’s technology industry may have key advantages over rivals in the US and elsewhere.

 

By global standards, Chinese tech giants in particular are highly innovative and diverse. Heavy Chinese investment in artificial intelligence, virtual reality, autonomous driving, and biotech is likely to create industry leading companies. China was the world’s largest buyer of industrial robots in 2017, accounting for one in every three installations.

 

Citi analysts favour tech disruptors in China and across EM Asia, where longer-term prospects are stronger than those in other regions.

 

The combination of demographic change, urbanization, and technological progress could create opportunities for consumer businesses as Asia’s middle class consumer spending is likely to more than double from US$12 trillion by 2030.

 

Likely beneficiaries of rising regional incomes include the makers of branded goods, personal electronics, alcoholic beverages, sportswear, cosmetics, homewares, and automobiles. Demand for healthcare treatment and for financial products – including insurance and pensions – are also projected to rise.

 

EM Asia Underappreciated Development

Investor concerns have been focused on the effects of rising trade tensions between the US and China. EM Asia has been a beneficiary of freer global trade over the last few decades with a falling dependency on export driven growth.

 

China – the region’s largest exporter – has become less reliant on exports to grow e-commerce. Chinese exports as a percentage of GDP have halved to 18% during the last decade. EM Asia’s exports to the US are 15% of GDP today, down from 22% of GDP in 1999. Chinese trade within Asia, by contrast, has expanded to 32% of GDP (see chart 3).

 

 

EM Asia Underrepresented in Benchmarks

EM Asia assets are currently underrepresented in global benchmarks. While 24% of equities and 16% of fixed income globally were issued in the region, they represent only 11% and 5% of global benchmarks. Citi analysts expect EM Asian assets to be given greater weightings within such benchmarks (see chart 4).

 

 

Conclusion

The strength of the US dollar and concerns over trade caused EM Asian asset prices to struggle in 2018. Citi analysts believe that this may have created an attractive entry-point for positioning portfolios to benefit from ongoing Asian development.

 

While EM Asian investments have a higher risk profile than Developed Markets (DM), adding them to a diversified portfolio could help enhance risk-adjusted returns.

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