As the global economy evolves over the next five years, there will likely be a deep recession in the West that will expose the latter’s structural fault lines and not just exhibit its more usual cyclical shortcomings. During this transformation phase, the true shape of the global economy of the 2020s will become much clearer to investors.
The Old World will confirm that it is indeed old. And the New World will underline that it is much younger. And, driven by the consumption that each group represents and the opportunities that flow from that consumption, investors will start to rebalance their equity and bond portfolios away from a massive overweight in the known but aged Western past towards a higher weighting in a brighter, younger but still uncertain Eastern future. Aging demographics will leave a very pronounced mark as ‘Japanisation’ envelops much of Europe and starts to infect even the United States. And yes, demographics will, by 2030, also start to show its mark in China too as a result of the one child policy. But, for another decade, the migration of some 20 million people per annum from rural to urban China will buy the country a massive ‘stay of execution’.
Demographics will generally have a much more positive effect on ABC – Asia Beyond China. Indeed, the next decade will constitute this region’s ‘coming out party’, the age when this other Asia emerges from China’s shadow. And combined – China and ABC – will change the face of the global economy as we know it. Demographics will help move the centre of economic gravity back to the region from which that centre drifted two centuries ago. With over 50% of the world population now living within a four-and-a-half hour flight of Chiang Mai, Northern Thailand, this will restore the natural order of the global economy.
There is no better way of understanding the truly mammoth scale of this impending transformation than to examine the Brookings Institute’s forecast that estimates the change in the size of the regional middle classes of the world, in the 15 years ending 2030. Globally, this group is expected to increase by some 2.4 billion people, from 3 billion to 5.4 billion. Regionally, Asia Pacific will account for 2.1 billion of this 2.4 billion increase. No other region is forecast to grow by 100 million: sub-Saharan Africa will rise by 98 million; the Middle East and North Africa by 93 million; Latin America by 50 million; North America by 19 million and; Europe, by 9 million.
There is already evidence of this coming transformation. Five out of six of the world’s fastest growing airlines are Asian, four non-Chinese (Thai Lion Air, Vietjet, India’s GoAir and IndiGo), and one Chinese (Spring Airlines). Sixteen out of twenty of the top international air routes by passenger are now intra-Asian and, of those sixteen, only three connect to mainland China, not including Hong Kong.
Although Asia’s tiger economies were rising even before China got into its economic stride, there is little doubt that China’s renaissance has had very positive implications for Asia as a whole. And – surely unintentionally – Donald Trump’s trade war with China is only hastening the spill-over from China to the rest of the region: Vietnam in particular has been a beneficiary from the translocation of factories out of China.
The Indian economic story is also starting to coalesce, though it would be wrong to dub it China II: the speed of India’s take-off will be slower than China’s and the make-up of the industries and service companies that will characterise that take-off will not be the same. Nevertheless, the second mega punch to come out of Asia in forty years – by 2030, India’s population is forecast to be 1500 million, comfortably exceeding China’s – will reinforce the massive reorientation (pun intended!) of the global economy towards Asia in the coming decades.
For investors, accommodating this change will not be easy. But given its scale, it will be impossible to ignore. And within five years, both China and India are likely to be running current account deficits. Both countries will actively need to attract global investment capital – and compete for that capital – to balance their external accounts. Expect Shanghai and Mumbai to be amongst the world’s most important stock and bond markets by 2040. And expect Singapore to be the world’s most important offshore banking centre by then too.
Over the past two decades, the world has been forced to appreciate the ‘Asia Rising’ story. But in the process, many observers have conflated the Asia Rising narrative with China’s spectacular re-emergence. But, without diminishing the achievements of China in that renaissance, this is not the only story in Asia: ask the Panda to stand aside for a moment and what is revealed is an aptly-named ambush of tigers. As big as the China story is, it is only half of the coming Asian story. Expect therefore the 21st century to be dubbed the Asian Century.