Investment themes to note amid Asia’s consumption boom

Invesco’s Asian equities team looks at what’s driving consumption in Asia and the related investment themes that result from these drivers. 

May 24, 2019 | Invesco Asian Investment Team

Continued urbanisation, steady income growth and the rise of technology have led to the phenomenal growth of consumer spending in Asia. We are confident that consumer demand in Asia will sustain solid momentum and continue to be a key driver leading regional growth.

Here are some structural factors driving consumption’s rise in Asia.

Asian equities to benefit from favourable external environment: 2019 will be a positive year for Asian equities. We believe the latest statement from the Federal Reserve represents a significant change from its stance in 2018. It is entirely favourable for Asia as this should reduce the risk of economic shocks from global interest rates.


Ongoing economic rebalancing in China: The Chinese economy is now on a sustainable path towards a consumption- and service-led growth model. We believe the country’s consumption boom will continue to support economic growth as consumption’s share of China’s GDP remains low compared with the global average.
 

Reforms in India to unleash efficiency gains: Structural reforms have been gaining traction in India in recent years. Initiatives such as financial inclusion and digitalisation have created a wide range of financial services, and new consumption patterns are emerging. We believe this will reboot the economy and increase market efficiency in the future.

Why Asian consumption is on the rise
Moving online: Technology has disrupted the way people consume, and nowadays an increasing share of consumer spending in Asia is happening online (see figure 1). We believe this trend is positive as the push towards higher participation in the online channels will make it much easier to tap into spending developments in areas that lack scale and logistical support.



Upgrading on the rise: Asian consumers are looking for products with higher quality or enhanced performance (see figure 2) and are more willing to pay a premium price to get what they want. We therefore believe consumption upgrading will be an important structural theme driving consumption growth in Asia against the backdrop of robust income expansion and strong wealth accumulation.
 


It’s about the experience: Modern-day Asian consumers are also looking for intangible experiences when deciding where to spend their money as they are not content simply with material possessions. Education, healthcare, sports, dining out and tourism, among many other areas, are set to experience unprecedented growth (see figure 3) and rise more rapidly than overall retail sales.
 


 

Emerging rural consumption: We believe the time is ripe for consumers in lower-tier cities and rural areas to play a bigger role in driving consumption growth in Asia. In China, more rapid income growth, improved accessibility and low penetration have led to stronger consumption expansion outside top-tier cities. In India, rural spending is expected to contribute more meaningfully to its economy given the government’s multiple initiatives focusing on rural areas.
 

The business of longevity: Global life expectancy is projected to extend to 77 in 2050 from 71 in 2015, an increase of six years. Almost one in four people will be over 60 by then. We believe the longevity business is a strong secular trend that will create high demand for health-related sectors. Health spending as a percentage of GDP in Asian countries is generally lower than in developed countries, indicating plenty of scope to catch up.

Considerations in Asian consumption related themes

Preference for Asia’s home-grown companies: We like Asia’s home-grown companies, meaning local brands operating in Asia, with consumer products or services offered directly to Asian consumers. This allows us to take advantage of opportunities across the full spectrum of consumer demand (mass, middle-class and luxury) rather than just high-end spending captured by luxury global brands.
 

Asian consumption becoming core allocation: Given the structural changes taking place in Asia as countries move away from being export- and investment-dependent towards a more consumer-led approach, the “Asia consumer demand” theme should be considered as a core allocation instead of a cyclical/tactical portfolio allocation.
 

Diversified investment theme: Compared with a pure sectoral strategy, which principally includes consumer staples and consumer discretionary companies, the “Asia consumer demand” theme encompasses a wide range of consumer-related stocks. This enables us to capture broad and diversified investment opportunities, which include healthcare and communication services stocks, as well as consumer finance and information technology companies.



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