Equity markets in Indonesian, Korea and the Philippines posted rallies in February. In particular, MSCI Indonesia returned 9.2%, followed by MSCI Philippines surged 8.5%, and MSCI Korea by 4.0% (all in their base currencies).
A portion of this performance was driven by February’s generally bullish market environment. However, the strong macroeconomic readings amongst Southeast Asian countries are beginning to get investors’ attention. In 2012, GDP growth was strong across the board for these countries, with the Philippines posting 6.6% growth and Indonesia reporting 6.2% growth.
The Long-Term Question
Clearly short-term measures are promising for these countries, but investors may also be wondering about the long-term story. Are emerging Asian economies poised for growth and if so, how should investors seek to capitalise?
The emerging market investment story might be better framed in terms of demographics. In developed economies--excluding the US--working-age populations are shrinking. By the mid-2020s, the eurozone's population will likely be in irreversible decline, and by 2050, a third of the eurozone's population will be over the age of 65.
Conversely, emerging markets now find themselves in an enviable demographic sweet spot where population trends favour economic growth. In the economies that comprise the ASEAN bloc, such as the Philippines and Indonesia, over 30% of the population is under the age of 20. Similar, though less extreme trends, are also evident in the BRICs.
A Switch to Domestic Consumption
The emerging market youth bulge, measured in terms of both relative and absolute size, implies future economic growth, but of a particular kind: growth in domestic consumption.
In the past twenty years, emerging market GDP growth has been fuelled simultaneously by infrastructure investments and the adoption of an export-oriented growth model. Increasing productive capacity helped exports grow, which resulted in more hard currency with which to expand productive capacity further and thus expand exports. This virtuous circle has expedited emerging market industrialisation and elevated living standards.
However, as emerging market economies begin to catch up to developed nations, the historical export-led growth model will likely be replaced by consumption-led growth. Today, with a burgeoning middle class on the horizon in most emerging market economies, discretionary income per capita is poised to rise. As a result, domestically-oriented firms are best positioned to capitalise on the emerging market citizenry's increasing purchasing power. Equity sectors that are likely best positioned to capitalise on this trend include consumer discretionary, consumer staples, healthcare, financials, and industrials.
Lee Davidson is an ETF analyst with Morningstar Europe.
