Rising incomes in Asia will probably be the most important investment story of the 2020s. Asia is home to 60% of the world's population, with both China and India each accounting for about 18% of the global total.
Rising incomes in Asia will probably be the most important investment story of the 2020s. Asia is home to 60% of the world's population, with both China and India each accounting for about 18% of the global total. Mike Bell outlines the significance for international investors.
As incomes rise, the Asian middle class is expected to grow by about 1.2 billion people by 2030, significantly boosting consumption.
As a result, Asia is an investment opportunity that's simply too big to ignore and warrants a larger place in many portfolios.
China's rising incomes
Visitors to Shanghai would be forgiven for thinking that China's development is mostly behind it. Indeed, China's growth has already been spectacular, rising from just 2% of global GDP in 1990 to about 16% in 2020.
What's more, China is already responsible for 35% of global demand for luxury goods. So it's understandable that there's a common perception that China is already rich.
However, when you travel west of the developed coastal regions you get a very different picture of the country and the ongoing potential for economic catch up is clear.
Indeed, while there are certainly many Chinese billionaires, average GDP per capita is only around $10,000. That represents impressive growth, up from only $1,000 in 2000, but remains a long way behind developed economies like the US.
As these regions urbanise and develop, productivity will rise such that, despite an outright decline in the working age population, China is still expected to grow by about 4.4% per year on average in real terms over the next decade. That means GDP and incomes should be about 50% larger by 2030.
That's an expected increase in incomes from about $10,000 per person to $15,000 per person. Multiply that increase in incomes by 1.4 billion people and you get an idea of the scale of the opportunity - a real increase in consumption of about $7trn.
That's an increase in annual Chinese spending power larger than the current size of both the German and UK economies combined.
This presents considerable growth opportunities in a wide range of goods and services - from premium food brands to insurance, healthcare and online tutoring.
Trade tensions are likely to persist between the US and China, and China is likely to be under increasing international pressure to meet higher environmental and labour standards.
But Beijing's most recent five-year plan demonstrates the action the Chinese government is already taking in these areas, including an ambition to be carbon neutral by 2060.
It's also worth remembering that exports to the US account for only 3% of Chinese GDP. Investors who refrain from investing in China because of trade tensions are unlikely to see a resolution in the near term.
By focusing too much on the politics, one risks missing out on the bigger picture of rising Chinese consumption.
India's young population
While China's economy is likely to grow by the largest amount in absolute terms, India is likely to deliver the fastest growth rate of any major country over the next decade.
With more than 480 million Indians under the age of twenty, considerably greater than the entire 370 million population of North America, the working age population of India is set to grow strongly.
Starting from a much lower base of GDP per capita of only around $2,000, real GDP should grow at 6.9% per year on average over the next decade.
That should lead real incomes to approximately double over the next decade meaning there could be a billion Indians in the middle class in ten years' time.
Raising their incomes to a point where many more households can afford higher quality food products and financial services, such as life insurance.
Growth at a reasonable price
MSCI Asia ex Japan trades on a forward price-to-earnings (P/E) ratio of about 17x, similar to Europe and significantly cheaper than the 22x P/E ratio for the US.
Valuations in India are similar to the US, but whereas the Indian economy should grow at 6.9% per year over the next decade, the US is only likely to grow at 1.8%.
Chinese equities are on a P/E ratio of about 17x earnings, at similar valuations to Europe, despite the fact that China's economy should grow at 4.4% compared with only 1.3% for Europe over the next decade.
In short, long-term growth is available at a more reasonable price in Asia than elsewhere in the world.
We think investors with a long-term investment horizon should focus on the exciting opportunity presented by gaining reasonably priced exposures to rising incomes and consumption in China, India and the rest of Asia.
Mike Bell is global market strategist at J.P. Morgan Asset Management
First published by our sister title Investment Week