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Asia in the Fast Lane

04.06.2013

Over the last few years, Asia has quickly transformed from a developing region to an engine for growth for the world economy. Asia's rapid ascendancy provides extraordinary opportunities for investors with a focus on the long term.

Asia in the Fast Lane - One Magazine

The world has been increasingly driven in recent decades by emerging market economies. Back in the 1980s, industrial and developing countries grew at the same rates. But since the turn of the millennium, average growth in developing countries has tripled in comparison to industrial countries. National economies in Asia have seen the most dynamic development. Their enormous growth has ensured that the proportion of the global GDP for the region has climbed at the expense of the industrial nations. According to IMF estimates, developed countries will experience an unprecedented drop in their share of global GDP, with a decline of 17 percent from 1992 to 2015. At the same time, developing Asia's share of global output is expected to increase by 18 percent, with 14 points since 2000 alone. 

Asia in the Fast Lane

Industrial countries have a falling share of world economic performance
Source: International Monetary Fund, World Economic Outlook database, BlackRock (October 2011; share of the global GDP, in terms of purchasing power parity – data from April 2011)

Greater Resilience

External shocks such as the financial crisis, the eurozone debt crisis or the lackluster economy in the US may have slowed Asian growth temporarily, but they have not derailed the structural growth story in the region. Equipped with significant cash reserves and political flexibility, Asian economies have been able to steer through these choppy waters without sinking and have subsequently resumed their growth trajectory. 

In addition, the conditions are good for Asia's economic growth to remain higher than that of the developed countries in the long term. As a result of the strict budget discipline that followed the Asian crisis of 1997, companies in Asia have robust balance sheets and public debt is low (except in Japan and Singapore). This is in stark contrast to the government debt of many Western countries, which climbed to dizzying heights following the financial crisis of 2008/2009, as governments had to prevent their national economies from collapsing. Comprehensive reform and improvement of their macroeconomic framework have considerably reduced Asia's vulnerability to external shocks. 

Positive demographic trends have been a key component of emerging markets' growth. While Western economies have to deal with an aging population, the number of working-age people has shot up in the developing countries. The consumer base is broadening thanks to an increase in the employment rate, a key requirement for economies that aim to negotiate the transformation from an export-driven economic model to a consumer-driven one.

More Credibility

The fact that Asian national economies have been able to close the gap with economic powerhouses such as Germany and the US can be ascribed in part to the significant progress they have made with their political and legal institutions. In recent years, the credibility and transparency of fiscal, financial, and central bank structures have improved significantly as authorities have recognized the importance of property rights in fostering global confidence in Asian economies.

Asia's future development will depend on how well the region manages the transition from export-driven growth to growth based on domestic demand. In order for domestic demand to increase and to make the population consume more and save less, decision-makers must remove hurdles to consumer growth. For example, they must create workable social safety nets such as healthcare, education, and pension systems.

In addition, considerable spending on infrastructure will be required to help the region develop its full growth potential. The related financing needs will offer numerous opportunities for investors. According to a study conducted by McKinsey,[1] about USD 8 trillion will be spent on infrastructure to make up for the underinvestment of the last 20 years.

Asia in the Fast Lane

Projected development of the global middle class
Source: OECD, Deutsche Bank. Data from July 23, 2012

Foundation for the Economy of the Future

In the meantime, Asia has achieved a level of prosperity that could mark the turning point toward more domestic demand. Although exports and investments in infrastructure were the main growth drivers in the last decade, Asia experts believe that consumers could become the new engine for growth in the coming years. Experts compare the impact this will have on the world to the rise of the American consumer in the 1950s, and they foresee considerable implications for companies, investors, and governments across Asia and the rest of the world. 

Asia's new middle class[2] forms the basis for Asian society. Its ambition, business sense, and consumption will drive progress and growth. China's middle class alone by that time would be bigger than the entire resident population of the European Union. By 2030, two billion people are expected to belong to this bracket. The growing affluence goes hand in hand with rapid urbanization. The middle class lives mostly in urban areas, which is why Asian cities have been the fastest growing cities since the turn of the millennium. Consequently, the urban Asian-Pacific population is expected to grow by over 21 percent over the next decade.[3] The OECD[4] estimates that Asia's middle class accounts for 23 percent of today's total consumer spending. The same estimates peg it at 54 percent by 2020, and it could easily reach 66 percent by 2030.

In order to offer its clients the best possible investment options and participation in this impressive growth, Credit Suisse Asset Management has built up an extensive presence in Asia. 

1. McKinsey & Company, Asia's USD 1 trillion infrastructure opportunity, March 2011.

2. It is difficult to accurately define the term "middle class." Homi Kharas, in a study published by the OECD in 2010, defines households that live with daily per capital incomes between USD 10 and 100 in terms of purchasing power parity as middle class. The Chinese Academy of Social Sciences, a state research institution, sets the bar at around USD 7,300 in annual income (as of 2009). Other international market researches put the threshold at USD 10,000 or more.

3. Singapore Economic Development Board, Future ready today – understanding the psychology of the new-Asia consumers.

4. OECD, The emerging middle class in developing countries, 2010

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