Stewart Langdon: Trim your sails for Asian Headwinds
MOST long-term projections suggest lands of opportunity now lie in the East, writes Stewart Langdon
Western market views of Asia are often binary: red-hot one minute, damp squib the next. It’s an odd attitude to a continent that is home to 60 per cent of humanity, living in 48 countries and speaking some 2,300 languages. Such short-termism can obscure exceptional opportunity.
The beginning of 2016 has seen Asia and other emerging markets firmly on investors’ naughty step. Of the famous BRICS (Brazil, Russia, India, China and South Africa), China is clearly slowing down amid concerns over its debt levels and governance (its stock market is down 20 per cent this year). Brazil and Russia are in full-blown recession.
Global macro dynamics have wreaked further havoc. Markets that rely on a high oil price (as in the Middle East) have been hard hit. Nose-diving exchange rates have added to the carnage for western investors. Since the beginning of 2015, the JP Morgan Emerging Market Currency Index is down 15 per cent.
But the big picture of Asia’s potential remains tantalising. By 2050, Asia will add another billion people. The Asia Development Bank predicts that by then Asia could be responsible for half of world output, with three billion people enjoying the same living standards as Europeans do today.
Progress towards this dazzling vision can be volatile and frustrating. But this often blinds even veterans of the region to how much Asia has already achieved. China has already grown its economy by a factor of 49 since 1978, when it first began to open its markets. India is 7.5x larger than it was at a similar moment in 1991. Progress on this scale was never likely to be entirely smooth.
By looking past the short term, Scotland can benefit from Asia’s bright future. Already many Scottish businesses have enjoyed the fruits of this growth. Cairn Energy was catapulted to the FTSE 100 by its success in Rajasthan. Standard Life has built one of India’s leading life insurance companies and recently tied up with ICBC in China, one of the world’s largest banks. Such developments have created billions of pounds of value.
Those willing to take a long-term view continue to find Asia alive with opportunity, often driven by favourable macroeconomic tailwinds.
After some difficult years, India is now the world’s fastest growing big economy, with a pro-business government and a disciplined approach to economic policy. Sentiment is starting to improve. And 1.3 billion people are accessing essential products and services for the first time.
Vietnam is another Asian success story, growing at a rate of 6.7 per cent last year, becoming an important manufacturing hub and perhaps benefiting from participation of women in the workforce, which at 78 per cent is higher than in the UK.
For more adventurous “frontier” opportunities, some investors are looking to Burma, where democratic hero Aung San Suu Kyi won last year’s elections and will now seek to improve the lives of her people.
The opportunities are not only geographic. As the spending power of its citizens continues to grow, Asia’s consumer businesses are prospering. Ericsson forecasts that the number of smartphones in Asia will increase from 1.3 billion to 3.2 billion by 2020. That will radically improve access to healthcare, education and banking in societies where such services have previously been too remote.
In energy markets, the collapsing price of solar technology (around 60 per cent since 2011) is a potential game changer for countries that have always struggled to satisfy their energy needs with traditional utilities.
Such innovation will be a vital catalyst and accessing new technologies from the West will be important. But Asia is also an increasingly important innovator in its own right. China now files far more patents than any other country, having lagged far behind only a few years ago. Japan is in third place and only a fraction behind the US. South Korea is fourth.
Attaining Asia’s potential is far from inevitable. There is much work to be done and serious risks to progress.
Those who can look past market drama usually do well. One who took a long-term view of the financial crisis in 1998 and invested in Jardine Matheson – a Scots-founded Asian business house – would now be sitting on a gain of some 1,952 per cent.
Scotland seems a long way from Asia. But these are markets where demand is high for the quality products and expertise Scottish businesses provide. To take advantage of Asian opportunities, investors and businesspeople need nuanced insight into the continent.
Being at the centre of intelligence flow from senior Asian leaders can be a real benefit. The Asia Scotland Institute caters precisely to this need through its events and networks. Join us. “The rise of the West transformed the world” wrote Singapore commentator Kishore Mahbubani, “The rise of Asia will bring about an equally significant transformation.” It would be a shame to be out of the loop.
• Stewart Langdon is a trustee of the Asia Scotland Institute and a Partner at LeapFrog Investments