Asia Driving Onwards: how can investors capture the enormous economic potential of Asian economies?

Asia's position as the new growth engine of the world economy is one of the most discussed macroeconomic trends of our times. So how can investors capture the enormous economic potential of Asian economies? After all, capital market developments in Asia have been divergent, both regionally and in different asset classes.

In recent decades the world has been increasingly driven by emerging market economies. They have outperformed the developed world not only in terms of share of global GDP but are also growing more quickly. 
GDP Growth by Country 
enlargeSince the turn of the millennium average growth in the emerging world has surged to rates that are three times higher than in developed economies. This growth has largely been driven by Asian economies. A flourishing Asia has secured an increasing share of global GDP at the expense of the developed world. According to IMF estimates, developed countries will see their share of global GDP decline by 17 percent between 1992 and 2015, an unprecedented deterioration. At the same time, developing Asia's share of global output is expected to increase by 18 percent. 
Asian government debt levels are looking attractive relative to G7 levels 
enlargeIncreasing Resilience to Global ShocksExternal shocks such as the financial crisis, the Eurozone debt crisis or lackluster growth in the US may have slowed Asian growth, but they have not derailed the structural growth story in the region. Equipped with significant cash reserves and policy flexibility, Asian economies have been able to steer through these choppy waters without sinking and have subsequently resumed their growth trajectory. Moreover, the legacy of the Asian crisis in the late 1990s ensured that both companies and governments have focused on balance sheet discipline.¹ Comprehensive reform of their macroeconomic framework and of the financial sector has considerably reduced the region's vulnerability to external shocks. Debt levels for Asian economies are expected to decline further, while the creditworthiness of Western economies is increasingly in question. 
Supportive DemographicsPositive demographic trends have been a key component of emerging economies' growth. While Western economies struggle with ageing populations and higher dependency ratios, the number of people of working age in emerging economies has grown rapidly thanks to population growth. The expansion of the working population in turn has increased the consumer base, thus bolstering private consumption, which is key for economies to master the transformation from an economy reliant on external demand to one powered by domestic demand.²
Advanced Legal Framework Fosters CredibilityIt must be noted that that more than just strictly economic factors, such as low sovereign-debt levels and relatively favorable demographics, have enabled Asian economies to narrow the gap with global economic giants such as Germany and the US. There have also been considerable improvements in 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 areas such as property rights in fostering global confidence in Asian economies. 
Appetite for Consumption – Asia Grows, Asia SpendsAsia's future path of economic growth is likely to be determined by how well the region can manage the transition from export-based growth to self-generated growth. Domestic demand expansion can be achieved when consumption and investment increase and the savings surplus is reduced. To achieve this expansion, policymakers need to encourage fixed asset investments, reduce barriers to consumption growth and introduce supportive measures. The improvement of the investment environment, the allocation of government expenditure to infrastructure development and the development of social safety nets, such as health, education and pension systems, will encourage consumption and reduce the savings ratio. 
Long-term observers of Asian economies believe that the rise of the Asian consumer is going to be the next megatrend in the global economy. Experts compare the impact this will have on the world to the rise of the American consumer in the 1950 post-world war era and expect it to have considerable implications for companies, investors and governments across Asia and the rest of the world. 
Focus Shifting to Domestic DemandThe rise of Asian economies that started in Japan already half a century ago has been a story of production. Led by China, increasing prosperity was largely based on export-driven growth and made Asia the world's biggest factory of electronics, toys and automobiles. So far, it was mainly the US that bought Asian products, causing Asian countries to run permanent trade and current account surpluses. The US on the other hand had to deal with ever increasing current account deficits. Almost half of the US deficit has been with Asian countries. In other words, the US consumption engine was the main driver for Asia's production engine. In the past decade, rising wealth particularly in China has created a new consumer for the region's goods. This has made China's economy increasingly less reliant on exports; low wages and cheap currencies are no longer the primary focus. Unsurprisingly, boosting domestic consumption is the key theme of China's 12th five-year plan (for the 2011–2015 period). In fact, if Asian countries manage to shift from being export-driven economies to ones powered by domestic demand, Asian currencies will have plenty of room to appreciate from here, thus simultaneously increasing Asian consumer's purchasing power. 
The Rise of the Asian ConsumerThe Asian consumer has tremendous development potential. While accounting for half of the world's population, developing Asia only produces 30 percent of global GDP. Chinese consumption only accounts for 35 percent of the country's GDP, compared to 65 percent in the US. At the end of 2008, Asia's population of 3.5 billion people spent less than 7 trillion US dollars while the US population of only 0.3 billion people spent 10 trillion.³ Previously held back by high savings rates, there are signs of a cultural shift among Asian consumers. China is already the world's largest market for many household products, such as TVs, refrigerators and air conditioners. China has surpassed the US as the world's largest automobile market. Although lagging behind a couple of years, India's consumer market is seeing similar signs of development. India is already the world's fastest-growing cellphone market in the world. 
Excerpt from the Credit Suisse white paper "Asia – Development, Financial Markets, Infrastructure and Consumption, China"Asia's Middle Class to Become the Centerpiece of Asia's Economic FutureA large part of consumption growth in Asia is expected to come from Asia's new middle class.⁴ Today, Asia accounts for 28 percent of the global middle class in terms of number of people. This share could double by 2020. China's middle class alone by that time would be bigger than the entire residential population of the European Union. By 2030, two billion people are expected to belong to this bracket.⁵The growing affluence goes hand in hand with rapid urbanization. Middle class consumers mostly live 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.⁶ The OECD⁷ 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.
¹ Aberdeen, Asian Bonds: A misunderstood opportunity, 2012² BlackRock Investment Institute, Are Emerging Markets the Next Developed Markets?, August 2011³ McKinsey Quarterly, Think regionally, act globally – Four steps to reaching the Asian consumer, 2009⁴ It is difficult to accurately define middle class. Homi Kharas, in a study published by the OECD in 2010, defines households as middle class that live with daily per capital incomes between USD 10 and USD 100 in purchasing power parity terms. The Chinese academy of Social Sciences, a state research institution, sets down the yardstick at around USD 7300 in annual income (as of 2009). Other international market researches are setting the threshold at 10,000 or more.⁵ According to Goldman Sachs⁶ Singapore Economic Development Board, Future Ready Today – Understanding the psychology of the new-Asia consumers⁷ OECD, The Emerging Middle Class in Developing Countries, 2010 

Courtesy: https://infocus.credit-suisse.com/app/article/index.cfm?fuseaction=OpenArticle&aoid=379887&lang=EN&WT.mc_id=CS%20International%2023%2E01%2E2013-379602