The Asia Investor

I have a confession to make. I like to read books. My goal is to try to read one book a month. There are years in which I easily reach that target, but in other years I fail miserably. Most -let's say at least 75%- of those are work related in some way, and the rest consists of travel literature, John Grisham (I read everything the man writes) and the like. Given that I've recently finished "The Asia Investor - Charting a course through Asia's emerging markets" by Aaron Chaze, I'd like to share some of my thoughts on that book.

The book starts off with the frequently asked question whether emerging Asian nations will be able to sustain their pace of growth in the future. The author asks himself whether the booming Asian economies have what it takes to move away from an export-led, external-trade dominated economy and truly embrace a free-market philosophy. Asia is buoyed by several trends that drive this region's opportunities and it is the analysis of these trends that forms the core of this book. In what follows, I'll briefly highlight some of the more interesting topics. (As the book was published in 2010, all figures date from before that.)

The first chapter discusses many ongoing trends and is loaded with facts & figures. For instance, you may or may not know that Coca-Cola and other foreign companies were forced to leave India in the 1970s when the Indian government began to make its presence felt on the private sector's turf and banks and other industries were nationalized. But even during the darkest days of state control, the Indian private sector continued to grow even as companies sought government patronage and entrenched players succeeded in keeping out competition. This phenomenon allowed the blossoming of several private conglomerates and turned them into industrial behemoths. Indian managers, companies and brands continued to develop and when India's experiment with socialism and nationalization ended in 1991 and the economy was reopened to foreign competition in 1993, the stage was set for a tremendous release of entrepreneurial energy. This is a big contrast with China which grew only state-owned enterprises and thus lacked the history of strong private-sector growth. Everything remained in the hands of the government until recently and even now a big part of the industry is state controlled or somehow state driven. Nevertheless, from the mid-1990s onwards there began to emerge a growing entrepreneurial layer within the domestic economy that is beginning to transform the state-dominated economic model into a hybrid economy, more like India's.

As recently as 2003, China did not have a single billionaire on the Forbes list, but by 2009 it had 28 (edging India with 24 into second place on the Asian billionaires list). The reasons why until recently India had a larger number of billionaires despite China's economy being three times larger is that India's private sector represents a much larger percentage of its economy. Indian private industry has been around since the early 1900s, and well before independence from Britain in 1947 the Indian private sector controlled steel and cement plants, airlines, hotels, insurance companies and banks. By 2009, the Indian private sector was contributing more than $800 billion to GDP as compared to only $600 billion contribution from the Chinese private sector, despite being 1/3 the size of China's GDP. I guess that's one more bulletpoint to add to those China-India comparisons you read all the time. In addition, Indian public equities markets provide investors with the option of buying into local listings of global corporations. For example: Siemens, ABB, Unilever, P&G, GlaxoSmithKline, Nestlé, Bosch and others have listed their subsidiaries in India and offer a serious alternative to global investors looking for high-quality exposure to India.

The Changing Investment Canvas. We all know that there is a large base of people in a number of countries in Asia who are well positioned on the road to prosperity. Even if the middle class across Asia grows at the GDP rate, at the minimum we are looking at doubling an already sizeable segment of the population every eight or nine years. Along with rising literacy levels and increasing disposable income, the emergence of this class of people is one of the biggest investment catalysts in the world today. The fact that the potential middle class market is large is beyond dispute, the real question is how large and what it means in purchasing power terms, especially for the more significant economies of China and India. The World Bank estimates that by 2030 about 93% of the world's middle class will be in developing nations (up from 56% in 2000) and 2/3 of that increase will be from China and India alone. During the remainder of the next two decades, China can be expected to add around 350 million people and India around 100 million people to the middle class bracket. The potential may well be even more significant.

Overall, 40% of the world's population is found in China and India, but they have a much smaller slice of the world's GDP pie. The fact that most of the world's fastest growing economies, companies and sectors, and the largest blocks of emerging market capitalisations are in Asia, underscores the tremendous potential for its share of world GDP to catch up. Some sectors did not even exist in an organised form a decade ago. Private education for example, is now one of the most attractive from a strategic point of view. The fact that stands above all others for most Asian families is that a solid education lies at the foundation of the Asian economic superstructure. Private education is therefore a sector which should give you great investment exposure to Asia's phenomenal rise.

Asia's Infrastructure Build-Out: The Next Great Investment Opportunity. The trends that propelled Japan, Taiwan and South Korea into the ranks of developed nations are now unfolding with varying intensities across several Asian nations. Rapid industrialisation backed by infrastructure spending, growing entrepreneurship, rapid technology absorption, developing inland trade and a growing service sector are some of the core trends in China, India, Vietnam, Indonesia, Malaysia, the Philippines, and to varying degrees in the Gulf Cooperation Council nations.

While roads, highways and ports continue to be of great importance and are the focus of fevered activity across Asia, in China it is the availability of potable water, its supply, distribution, care of its waterways and treatment of wastewater that is now absorbing the attention of the government. While per-capita water consumption has been increasing for several years, water reserves have declined by 7-10% per year over the past several years. This problem is compounded by the increasingly high levels of pollution in China's waterways that limits potable supply to residences and industry. According to the China Hydraulic Engineering Society, China's multi-decade boom has left rivers and lakes severely polluted. This is all the more alarming considering that China has only 8% of the world's water reserves but more than 20% of the world's population to supply. And it only gets worse from here: 2/3 of China's rives are said to be polluted, many of them severely. The Chinese government is responding to this potentially devastating resource crisis as only it can: with massive doses of capital investment and blanket financial and policy support to global and domestic firms engaged in various water and wastewater infrastructure programs. Not surprisingly, the urban water supply industry had been listed as a key industry in China's 11th Five-Year Plan. With one of the world's longest coastlines, China is also the largest emerging market for desalination facilities.

Desalination as a water supply alternative is expected to grow significantly over the next few years. Very few of the consumables and equipment required to run desalination plants, such as high-pressure pumps and energy-recovery devices, are actually manufactured in China and the industry is therefore dependent on foreign firms and foreign technology to accelerate desalination investments. In essence, companies related to all aspects of the supply and treatment of water and related waste-disposal infrastructure have a fertile environment in China and most of Asia as water has now gone to the top of the infrastructure policy agenda in several countries.

The book discusses much more similar trends such as growing trade links between key Asian nations, the evolution of a robust pan-Asian financial infrastructure, political stability, growing institutionalisation of these economies, and many more. The book can surely be considered as a nice introduction to investors who are relatively new to emerging Asia (it also mentions a lot of companies active within each of the mentioned trends) and its tremendous opportunities and challenges, but may be a tad disappointing to investors already more familiar with the story.

Until we read again,

Gino