The continued rise of the Asian consumer

“When looking at Asia, we are trying to figure out what it will look like 10-20 years down the line,” says Robert Horrocks, CIO and portfolio manager at Matthews Asia, the California-based Asia investment specialist with $21bn (€16bn) in AUM.

Asia’s consumption-led growth story has been driven by the rise in wages, and disposable income, in line with increasing productivity and skills. This trend is set to continue and explains why consumer stocks look expensive today compared to the rest of the market.

 “It is much easier for consumer-facing businesses to build a brand, some kind of protection and sustainability of earnings growth, because they are capturing an emotional part of the consumer psyche,” states Mr Horrocks.

Those stocks ought to trade at a premium to manufacturers, heavy industry or infrastructure businesses, he says.

Women’s participation in the labour force will go up, meaning fewer children for familes. This will put a premium on luxury and convenience spending, media, entertainment and leisure. There will also be more demand for services such as wealth management or healthcare.

It is important to seek  out businesses which create and promote their brands, and start building their own reputations of quality and reliability. 

Companies that look expensive in the short-term may in fact be reasonably priced. Markets have a real problem pricing these factors in, he notes, as most investors have traditionally looked at Asian equities in the short term, as a leverage play on global growth, to add a “tactical fizz” to their portfolio, although this mindset is gradually changing.

Value of dividends

Dividend-paying companies have always been part of Matthew’s investment philosophy. These are more prevalent in Asia, across industries and the market cap scale, than in the US, where they are mature, late life-cycle kind of businesses. “In Asia, a lot of companies are family-owned and dividends are a great way for the family to extract value from the business, and are important for minority shareholders too.”

Paying dividends has always been a very strong indicator and alpha factor in Asian investments, too often overlooked, adds Mr Horrocks.

Concerns over China’s economy slowing down are still prevalent in the market, but it is the type of growth that is important, not whether China’s GDP is expanding at 10 or 7-8 per cent. This means placing more emphasis on virtual infrastructure and on investments enhancing service productivity.

“Whilst fixed capital investments, buildings, infrastructure will continue growing at a rapid pace, investments in software, enterprise resource planning, education are going to become more and more important,” he says.

Even in areas such as retail, productivity has increased significantly through the internet. Smart software companies producing systems monitoring sales or logistics, which make distribution or employees more productive, are also interesting.

Many industries might look enticing but businesses need to be scalable and able to grow profitability, explains Mr Horrocks. This is why among the businesses in the fast-growing healthcare industry, those serving individual customers are going to have more legs than those serving the government, with its imperative being to keep costs low.

The insurance industry, which will be boosted by increasing women’s earning power, also looks attractive as more disposable income is going to flow into preventative healthcare and insurance. “Women generally do tend to dominate the consumption decisions of families,” notes Mr Horrocks.