Hugh Young: Southeast Asia emerges from China’s shadow

Hugh Young

Did you know that Indonesians, on average, buy new shoes every six weeks? That urban Thais visit a hypermarket at least once a week and spend around half their monthly bills on groceries? That the number one pre-prepared beverage in Malaysia is the isotonic sports drink?

For most of us, this is the sort of random information usually reserved for a pub quiz. For fund managers, however, these are valuable insights into consumer behaviour that reflect some of the changes to have occurred in Southeast Asia over recent years.

Most discussions of Asia are usually dominated by China. Its meteoric rise has changed the world, from the prices we pay for consumer goods, to the global demand for natural resources and even the flow of international capital. But China is not Asia.       

For some time now, the Association of Southeast Asian Nations, better known as Asean, has been trying to move out of its giant neighbour’s shadow.

It has been succeeding because it recognises the need to shift away from commodities and raw materials extraction (from which it has done quite nicely selling to China) towards economic activities further up the value chain. It has developed into something that resembles a single market with 625 million consumers, while adding members such as Vietnam, Laos, Myanmar and Cambodia.

Asean has also been helped by anxiety among foreign investors in China, a country fast losing its reputation as a place for low-cost manufacturing.

That is the reason why, just outside Bangkok, Thailand has its own version of “Motor City” (before Detroit became a byword for bankruptcy), why more than 80 per cent of the world’s hard drives are made in Asean and why your Levi jeans may have come from a factory in Cambodia.

In short, Asean has been growing smartly for several years but not so recklessly as to be worried about its banking system or the property market that could bring the region to its knees. Where China talks of rebalancing, Asean has mainly found its happy medium of exporting and recycling wealth at home in the form of growing consumer demand.

We have long found the consumer theme a potent one. Incomes have been growing from a low base and there is huge pent-up demand for housing, consumer durables, transport and banking services. In many countries, this is happening hand in glove with urbanisation. These countries are also in a sweet spot, as they do not have the one-child, sudden ageing demographics of China. Populations are young.

Domestic consumption accounts for around 70 per cent of economic growth in the Philippines and has done so for some time, according to Jaime de Ayala, chief executive and chairman of Ayala Corp, the Philippines’ oldest conglomerate. Remittances from overseas Filipinos have been a strong driver of middle-income consumer markets such as telecoms, real estate and other services.

Meanwhile, the investment case for Indonesia, Asean’s biggest member, has been closely tied to its population of some 254 million people. Over half of all Indonesians live in cities and this number increases by some 300,000 every year. This matters because people who live in cities tend to earn and spend more than their rural counterparts.  

What makes all this so attractive to investors is that companies that operate within the consumer arena are not all subject to government control, as are more “strategic” sectors. This means competition exists and innovation follows.

Not all is perfect, though. After several years of strong growth, household debt has crept up to levels that need to be watched and non-performing loans are unlikely to stay as low as they are. Many Southeast Asian countries may need to tighten loose monetary policy. If the dollar continues to strengthen, policymakers may be forced to act to dampen imported inflation and support local currencies.

The larger question then arises as to whether growth rates are sustainable going forward. One criticism is that Asean nations have failed to invest enough in education and have become too reliant on cheap labour to fund their deficits. This is bad news for future productivity.

Another gripe is that the political structures needed to ensure wealth is spread more evenly simply do not exist. The rich prefer partial democracies where they can use their influence to buy popularity by promising hand-outs. This locks the poor into a cycle of dependency. In a country like the Philippines the most talented often leave for better opportunities elsewhere.

But generalisations can also be dangerous. This year we have seen a former furniture salesman become Indonesia’s new president. On the other hand, Thailand’s army, with the encouragement of the urban elite, decided democracy was too dangerous because they did not like who kept winning.

Asean may not be as closely integrated as, say, the European Union. But it has managed to persuade former rivals of the benefits of closer cooperation and to create an environment conducive to sustained economic growth.

In doing so, it has also created somewhere for shrewd foreign investors to make good money.    

Hugh Young is managing director of Aberdeen Asset Management Asia