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Shanghai shops

The numbers still add up

24 September 2015

Hugh Young of Aberdeen Asset Management argues that investors should take more note of Asia’s exceptional retail prospects.

Did you know that Chinese online shoppers spent some $5.7 billion on a single day in November last year; that more and more well-heeled Indian consumers prefer to buy their tea from a pharmacy; or that urban Thais visit a hypermarket at least once a week and spend around half their monthly bills on groceries?

For most of us this is information reserved for a pub quiz, but for fund managers these are valuable insights into consumer behaviour that reflect some of the changes that have occurred in Asia over recent years.

China’s meteoric rise has changed the world, from the price we pay for consumer goods to the global demand for natural resources, and even the flow of international capital. Much has been written about how policymakers in China are promoting domestic consumption as a future driver of growth, but in fact the nation’s consumers have been flexing their muscles for some time.

E-commerce-crazy China also happens to be the world’s biggest smartphone market with 98.8 million sold in the first three months of this year alone. The country is the world’s biggest car market and, with India, vies for the title of the world’s biggest market for gold.

However, it’s easy to get overly fixated on China. India is another country where reform is on the agenda and where a growing urban middle class is changing the way people spend their money. This is important because people who live in cities tend to earn and spend more.

While only three in ten Indians are classified as ‘urban’ in census statistics, urban consumers account for more than 70% of the market for so-called ‘fast-moving consumer goods’ (FMCGs). These consumers are developing new patterns of retail behaviour.

For example, pharmacies have emerged as the fastest-growing ‘old economy’ sales channel for FMCGs. Chemists attract a more upmarket customer who seems to prefer buying packaged teas, fruit juices and healthy foods from a man in a white lab coat.

New opportunities

Elsewhere, the ten-nation Association of Southeast Asian Nations, better known as ASEAN, has developed into something resembling a single market of some 625 million consumers. This has helped the region to emerge quietly from China’s giant shadow.

There has been a shift away from raw materials extraction towards economic activities further up the value chain. Where China talks of rebalancing, ASEAN has mainly found a happy medium of exporting and recycling wealth at home in the form of growing consumer demand.

Incomes have grown from a low base and there is a huge pent-up demand for housing, consumer durables, transport and banking services. Populations, as is common throughout the emerging markets, are young.

Domestic consumption accounts for around 70% of economic growth in the Philippines, and has done so for some time, according to Jaime Augusto Zobel de Ayala II, chief executive and chairman of Ayala Corp, the country’s oldest conglomerate. Remittances from overseas Filipinos have been a strong driver of middle income consumer markets such as telecoms, real estate and other services.

Meanwhile, the investment case for Indonesia, ASEAN’s biggest member, is closely tied to its population of 254 million people. Over half of all Indonesians live in cities and 300,000 more each year do so.

What makes all this even more attractive to us is that consumer businesses aren’t subject to stifling government controls, as tends to be the case with more ‘strategic’ sectors such as defence, utilities or aviation. Therefore competition exists and innovation can follow.

Asia is struggling to regain momentum in part because of its reliance on Chinese demand. While growth rates are still higher than in other parts of the world, corporate earnings are falling, which may affect jobs and wages.

However, there are lots of people in Asia who are getting richer. Many have a disposal income for the first time in their lives and want to spend this money; and the most successful companies have already figured out a way to tap into these fundamental changes. While Asia must overcome many immediate challenges, an investor would do well to remember the longer-term trends that are changing the lives of billions of people across the region every day.

Hugh Young of Aberdeen Asset Management is the manager of the St. James’s Place Far East fund. The opinions expressed are those of Hugh Young and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or St. James’s Place Wealth Management.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.

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