Riding Asia's growth over the next decade

A new report from DBS Bank, titled Imagining Asia 2020, details how Asia will grow over the next decade.
In an interview with Yasmine Yahya, DBS strategists explain how investors can ride this growth.
The Straits Times, 6 Nov 2011

The ongoing debt crisis in the euro zone and the unemployment and debt problems in the United States have shown the world that Asia is really where the money is.

After all, Asia has grown at a remarkable speed over the past decade, and is expected to continue to do so in the next 10 years.

DBS said in its report that the Asia 10 - China, Hong Kong, Taiwan, South Korea, Singapore, Malaysia, Indonesia, Thailand, the Philippines and India - will have a combined gross domestic product of US$22.4 trillion (S$28.4 trillion) in 2020, some 17 per cent larger than the US economy's.

DBS' head of investment communications, Ms Mah Ching Cheng, told The Sunday Times that with selective long-term investments in certain stocks and bonds, investors could tap this growth for their own wealth creation.

Consumption

It is no secret that Asia's rapidly expanding middle class will lead to a boom in consumption over the next decade.

One way to tap this growth is by buying the stocks of listed palm oil and rubber producers.

'Of particular interest are the palm oil and natural rubber sectors, for which we believe Asia is key - both as a producer and consumer,' Ms Mah said.

'Demand growth in these two sectors is likely to be contributed mainly by China, India and Indo-nesia, accounting for around 40 per cent of the world's population.'

Global demand for palm oil and rubber is expected to match or exceed supply, and the annual sales value of these commodities has been forecast to double over the next eight years, she added.

Over the next eight years, supplies may become increasingly restricted due to erratic weather caused by global warming, rising biofuel demand on restrictions in carbon emissions, and the remo-val of farm subsidies due to Western governments' weak fiscal positions.

Another way to ride on the consumption trend is by picking up shares in automakers, said Ms Mah.

China's automobile industry has become the largest in the world in terms of sales volume, she noted, and is expected to notch a compounded annual growth rate (CAGR) of 5.3 per cent in the next decade.

In Indonesia, Malaysia and Thailand, demand for automobiles is expected to rise at a CAGR of 10.5 per cent in the next 10 years.

'With the region's political commitment to stimulate foreign investment flows, infrastructure development and job creation, the automotive industry should remain a good proxy to these countries' long-term economic potential,' Ms Mah said.

Housing

According to DBS, Asia will have added another 290 million people to its population by 2020. That's almost the entire population of the United States.

Naturally, housing will be in high demand amid this population boom, and residential developers are set to do very well.

'Growth dynamics vary according to stage of market development and demographics in each country,' Ms Mah noted.

'The major driver in Indonesia and Malaysia is volume growth in view of the young population, while in China and Thailand, low ownership levels and a young population median age also means robust consumption and demand for housing.'

Singapore is the only market where the Government, via the Housing Board, is its dominant provider, accounting for 80 to 85 per cent of the market, she said.

Home ownership is also high, and thus volume growth is likely to remain modest with demand drivers coming from new household formation as well as movement up the value chain.

Environmental solutions

Buy stocks of companies in the water or alternative energy business, especially those in Singapore and China, said Ms Mah.

In the long term, water companies will likely become yield rather than growth plays, she added.

'The majority of their revenue and net profit will come from operating projects with very steady cash flows to fund their construction work, while their exposure to desalination and recycled water projects should also increase.'

In the alternative energy space, continual improvements should be made in the basic design of both wind turbines and solar panels, with some of the lower value-added processes moving outside China.

'We think that in the next decade, China will produce 90 per cent of the world's solar panels and 50 per cent of the world's wind turbines.'

Coal

The regional coal sector can be viewed as a proxy for power generation demand in Asia, Ms Mah said.

Asia accounts for 65 per cent of world coal demand, with China and India accounting for 44 per cent and 13 per cent of consumption respectively.

DBS expects Asian coal demand to continue to grow at an average rate of 8 per cent a year up to 2020, reflecting the strong gross domestic product growth of China, India and other Asian countries like Indonesia, Malaysia and Vietnam.

'Given the promising sector outlook with resilient demand, and supply shortages due to sector consolidation and transportation bottlenecks, we expect coal miners to continue to enjoy strong pricing power and attractive earnings growth as a result of price of volume increases,' Ms Mah said.

Bonds

Bonds should have a place in every investor's portfolio, DBS strategists say. 'There are opportunities in both developed and emerging market bonds and there is a place in all portfolios for both categories of bonds,' said Ms Mah.

DBS' group head of wealth management Tan Su Shan said: 'The Asian debt market, particularly Asian corporate debt in local Asian currencies, has grown tremendously this year.

'This has provided ample opportunities for Singapore dollar, Chinese yuan and US dollar investors to invest in both investment grade and high yield Asian paper.'