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Why the Tiger economies are poised to pounce

Why the Tiger economies are poised to pounce

Mike Kerley, Fund Manager of Henderson Far East Income Ltd and Director of Pan Asian Equities at Janus Henderson Investors discusses how local Asian companies are challenging multinational brands and driving growth across the region.

After seven years of flat earnings growth, the Asian market is showing signs of life again. The Tiger economies are waking up and are on the prowl, led by a resurgent China.

Asian stocks, excluding Japan, outperformed the world in 2017 (see Chart 1) and many analysts believe the region is likely to continue its growth story through 2018 and into 2019, but of course analyst forecasts are by no means a guarantee of performance.

Chart 1

Asia has historically been geared into whatever the rest of the world has been doing because it was making products and selling it to the rest of the world. The region has done very well out of this but we think this story is at an end.

Firstly, low cost labour is not low-cost anymore – especially in China, where wage growth has been quite rapid. Secondly, Asia’s market share of world-produced goods is so high they can’t gain any more market share. As of May last year, Chinese companies accounted for more than 25% of the global manufacturing industry, while the country was the leading producer of 220 of the world’s 500 major industrial products. (Source: Ministry of Commerce of the People’s Republic of China, May 25, 2017).

In terms of growth, where does China go from here? Firstly, we think local brands will gradually eat into the market share of multinationals in local markets. The next growth leg of Asia will then come from increasing the value of the goods it sells to the rest of the world.

Mikke Kerley HFEL interview

China’s growth story

Historically, Asia has generally been associated with low-cost manufacturing and consumer goods. That’s changing. China is at the forefront of this change, and for the first time ever, we believe China will spend more on research and development (R&D) this year than the US and within five years we think it may spend more than the EU and US put together (see Chart 2).

This is a huge shift and it’s in new areas, like electric vehicles, renewable energy, healthcare, artificial intelligence and virtual reality – things we will embrace in years to come and have the potential to become part of our day-to-day lives.

Chart 2