Schroders - The four 'M's: why the 21st century belongs to Asia

Events in the world’s two most populous nations capture the dynamic of why we believe Asia will shape the 21st century, and command the attention of the long-term global investor. Unprecedented energies are being unleashed through an alignment of digital innovation - and the four ‘M’s that characterise Asian consumers: millennial, middle-class, metropolitan and mobile-enabled.

For a look into the future of the global economy, and where the power is shifting, consider technology developments in both China and India. In a mere decade, China’s e-commerce market has grown from less than 1% of global sales, into the world’s largest market in 2016, representing more than 40% of transactions by value. Platforms such as Alibaba and JD.com reach nearly a billion eager shoppers, in a market three times bigger than the US.

Meanwhile, India’s adoption of mobile technologies is surging at an astonishing rate as Reliance Jio – which became India’s dominant tech firm virtually overnight – brings fast connections to India’s 1.3 billion people. Even as Covid-19 spread, Google and Facebook separately invested billions in this telecoms company (a highly unusual step for rival tech giants) amid projections it would hit 500 million subscribers by 2023.

HOW THE FOUR M’S UNDERPIN A BRIGHT ASIAN FUTURE

We do, of course, live in times of uncertainty, and there is plenty that could go wrong in the narrative of Asia’s 21st century ascent. Trade frictions between China and the US, a possible fragmentation of 5G practices, regional rivalries within Asia and uncertain coronavirus outcomes all pose threats to the continent’s future and to the global economy as a whole.

Despite this, there is no denying the social and demographic trends that give momentum to Asia’s rise to global economic leadership. Today’s Asian consumer is driving a transformation in the continent’s economic growth model that will play out for decades. From being the West’s manufacturing workshop, Asia has reinvented itself as an innovation leader serving increasingly demanding and sophisticated home markets, now defined by the four Ms.

Global investors are paying heed, both through private equity and capital markets. According to CB Insights, China already has almost half the US’s number of “unicorns” (start-ups valued at more than $1 billion), with 118 versus 238. India is fast rising up the global unicorn ranking, coming third worldwide with 24. Meanwhile, global demand for Chinese assets has hit a record high during the pandemic, with foreign holdings of Chinese bonds and equities surpassing Rmb 1 trillion (approximately $150 billion) through August.

MILLENNIAL

The four Ms represent a convergence of positive factors that will shape the Asian century. First, let’s look at the millennials. There are 800 million of them in Asia, compared with 66 million in the US (and 60 million in the EU). They are fast becoming the world’s most avid consumers, driven by optimism and ambition. 65% of millennials in emerging markets expect to be better off than their parents, versus an equivalent percentage in developed countries who expect to be worse off.

MIDDLE CLASS

Next, let’s consider Asia’s burgeoning middle-classes. Hundreds of millions of people across Asia have newly joined middle income status, representing a vast pool of purchasing power. From an investment perspective, one key Chinese consumer trend has been a preference for local brands. A McKinsey survey found Chinese now prefer domestic brands for 15 of 17 selected categories, including electric appliances and personal products.

According to the Brookings Institute, Asia will account for nearly nine in 10 of the next billion middle-class consumers. Most will live in China, India and Southeast Asia, and, by 2025, consumer spending by the Asia-Pacific region’s middle-classes is forecast to surpass the rest of the world combined.

That means industries and sectors oriented toward consumption have great potential to grow. Consumption trends combine with rising health consciousness to make consumer technology and healthcare two of the most significant Asian investment opportunities today.

METROPOLITAN

Now, let’s look at metropolitan clusters. Asia’s growth is enabled by growing urbanisation, as workers pursue their dreams in cities. Today Asia has more than 300 cities with a population greater than one million; the US has 10 and the EU has 18. Asia’s high-density populations provide ideal conditions for companies to grow. It fosters a virtuous cycle of scale, leading to faster, cheaper, more innovative products and services. A powerful example is Chinese ride-hailing app Didi Chuxing, which has 30 million active drivers who are, today, 10 times more numerous than Uber’s.

MOBILE-ENABLED

Finally, let’s consider Asia’s eager mobile technology adopters. Asia has over 4 billion mobile phone subscriptions and more than 2 billion internet users, more than any other region, providing massive scalability for consumer technology.

Alibaba and other tech groups such as We Chat and Tencent are carving out innovative paths to tapping this consumer energy with super-apps that combine services such as e-commerce, ride-hailing, social messaging and even insurance.

In India, innovators such as Flipkart and Paytm are reaching the farthest reaches of the subcontinent - as Reliance Jio pursues its dream of bringing affordable telecommunications services to every Indian.

WILL THERE BE AN IMPACT ON GROWTH AND INNOVATION IN THE POST-COVID AGE?

The Covid-19 crisis is not dimming down Asia’s bright outlook. Rather, it reinforces prevailing trends. Asia has so far rebounded, both from a health and economic perspective, faster and more robustly than the western economies.

Asia has used disruptions caused by the pandemic to accelerate the development of digital innovations critical to the post-pandemic era. These include remote communications, digital healthcare, mobile payments, e-commerce, and next-generation mobility.

China, in particular, has delivered a standout performance. Its economy posted 4.9% GDP growth in the third quarter, and the International Monetary Fund projects that China will be the only major economy to grow in 2020, with an estimated 1.9% expansion.

China is also experiencing continued vigour in its initial public offerings market; the process by which private companies offer shares on public markets for the first time. There have been 118 new listings in the financial year up until July – even as listings fizzle elsewhere.

These trends may only be reinforced by the inclusion of China’s currency in global indices and the growth of local currency financial markets in coming years. Moreover China’s focus on internal manufacturing growth – known as “Made in China 2025” – could help to insulate it from any escalation from trade wars.

While India has taken a far bigger health and economic hit, we think the overall outlook remains strong. India’s consumption narrative is the perfect complement to China’s industrial ascent, the two representing two pillars of Asian 21st century advances. The IMF forecasts that India will bounce back from Covid with 8.8% economic expansion in 2021.

The pandemic has spurred India to embrace digital transformation even faster than in pre-Covid-19 times. According to the World Economic Forum (WEF), the crisis has inspired a “public-private push [to make] India a digital-first country, resetting the basic life experience and aspirations of more than a billion people.”

Immense challenges lie ahead, not least ever-present regional tensions as these increasingly assertive countries take centre stage. However, with increased presence comes an increased focus and recognition of the importance of diplomacy in forums such as the UN and WEF. And the dynamism, aspiration and innovation vigour of the four Ms promise to make Asia’s century one of almost limitless possibility.

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