For long-term investors, coronavirus is likely to prove less important than fundamental structural changes to Asia's economy
Over recent times, China has run into headwinds stemming from the US-China trade dispute, the level of domestic debt, concerns over a broader global economic slowdown and the shock of the coronavirus outbreak in early 2020.
The mood had seemed to lighten at the start of 2020 as the US and China agreed a phase 1 trade deal. The agreement signed by US president Donald Trump and China's vice premier Liu He does avert painful tariffs and while it is far from all-encompassing, it signals no major escalation for the time being.
However, the rapid spread of the coronavirus in the early months of 2020 has introduced a new risk factor. The drumbeat of day-to-day headlines threatens to drown out the longer-term story of growth across the wider Asia region. Teera Chanpongsang, manager of the £3.0bn Fidelity Asia Fund, says significant structural change is underway inside the region that is easy to overlook.
Regional structural shifts
"Intra-Asia demand now makes a significant contribution to domestic revenue generation," says Chanpongsang. Important in itself, this may mean any further trade issues have less impact on an increasingly domestically-driven regional economy.
There are other fundamental long-term trends. Asia's population continues to grow, and now makes up nearly 60% of the world's total population compared to Europe's share of under 10%.
But it's really the changing lifestyle of this growing population that is making waves, with Asia now claiming 26 of the world's 40 megacities (over 10m people) (1) and contributing an ever greater share to the growing global middle class. "Urbanisation and the rising middle class across Asia is the secular growth story that is driving Asian consumption," says Chanpongsang.
Rising consumption, in turn, is creating regional giants. Alibaba's 2019 ‘Singles Day' sales extravaganza broke records with $38.4bn sales compared to $30.8bn last year - dwarfing similar events in the US and other developed economies. Fidelity's experts think that one effect of the coronavirus tragedy may be to increase the penetration of online consumption still further, with online services such as e-tutoring, entertainment, and grocery delivery all receiving a forward push.
‘Asian century' implications
But the long-term Asia growth story has bigger, strategic implications for investors:
• First, Asia's growth story should be driving a re-weighting of the Asia Pacific region within many investment portfolios. By 2040 Asia may drive 40% of global consumption, up from around 30% today.(2)
• Second, investors need to respond to the changing shape of the Asian economy, as new industries emerge and others increase in importance, helping to determine a new set of corporate winners and losers.
Fidelity's analysts, for example, are tracking the success of Asian firms that offer a local twist to products while charging a premium price (‘premiumisation').
Chanpongsang has followed the dramatic rise of the region's economy since joining Fidelity as an analyst in 1994, and says he has watched "beginners mature into market leaders". This includes the rise of China's largest cookware company, a winner in the market to supply camera modules for android phones, and a well-positioned airports operator.
For Chanpongsang, geopolitical stresses are less important than this long-term picture of growth and change. "There is no going back on regional structural shifts that have already been set into motion," he says.
- GlobalData, February 2019; bit.ly/2SjgXH2
- McKinsey & Company, The Future of Asia, September 2019; mck.co/2Sm7tKX
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