In this Asian Century there have already been some ‘interesting times’, as the Chinese say. However, the compelling underlying themes remain. Both China and India are giant Asian economies positioned to regain much of the world’s wealth they lost during the two centuries of European colonialism.
This century is called the Asian century because developing nations are growing fast with Asia now 60% of the world’s population and Africa gaining rapidly. China is the world’s 3rd largest economy (15%) behind the US (25%) and the EU, even without the UK. Then comes Japan and India. China has almost 19% of global population, India has 18% and Indonesia has 3.5% – let’s call this 40% of the world ‘Chindia’. It’s a rapidly growing area and as its middle classes achieve more wealth, we’re seeing them travelling and consuming more. To compare, the US is the wealthiest nation with 4.4% of the people – about 1/10th of ‘Chindia’.
In the 80s and 90s, the South East Asian ‘tiger’ economies led global growth, then China led the growth charge. But lately, India is growing faster than China with huge potential for both sustained development and broad based wealth creation. We expect ‘Chindia’ to dominate global growth for the rest of this century. The table below shows how densely populated this area is when compared with the US, Brazil (another growth area) and Australia with its largely unusable core.
China has experienced some indigestion because its recent growth was debt funded, bringing its growth forward; while India’s future growth is largely unhindered by major debt. Both, but India especially, are positioned for sustained economic growth. As this unfolds in the years ahead, the effect of their different demographics will be interesting to observe.
China’s aging profile hinders growth, India’s can empower
China is the only country in the world that tried to manage our planet’s over-population. Their one-child experiment did reduce population growth but is now over, leaving them with an aging population. In the short term, China’s large working generation should help sustain growth, but it may herald a severe demographically driven growth drag by 2050. Japan is facing a similar problem today.
China has enjoyed two strong decades as its boom generation moved into the working years. But its beneficial demographics will soon start working against it as they retire with fewer children coming behind to backfill. This will create a more dependent population. By contrast, India’ dependency is declining as its youth grows into working age – suggesting prosperity ahead.
India’s huge young population is just starting its demographic bulge and should grow into China’s current demographic shape in 30 years or so. So, India is on the brink of years where it might utilise its beneficial age profile towards strong growth for decades ahead. In India, participation of working women is 29% compared with 70% in China, so India may also mobilise its female population for extra growth from their greater workforce participation
India needs economic and social reform
Despite India’s growing, well-educated middle class, it needs improved infrastructure and education, tax and labour law reforms for all to realise its potential. Indian Prime Minister Modi seems to understand this. In the past India has been characterised as ‘managed chaos’, in contrast to China’s centrally planned economy of ‘build it and they will come’. But if India’s growth is to be sustainable and its growth potential unleashed, the rewards must be shared across all levels of society.
Will the young tiger catch the aging dragon?
What about South America?
The largest economies in South America are Brazil and Mexico. Behind these are Argentina, Colombia and Chile. Of these, Brazil and Mexico have the greatest potential once crime and corruption are controlled. Imagine their abundant resources overlaid with Chile’s disdain for corruption. In the years ahead, these are growth regions to watch.
Brazil is a bigger land mass than Australia and it’s all fertile. It is South America’s largest economy and eighth in the world, resource-rich with diverse agricultural and manufacturing sectors. It has fertile land and the world’s 5th largest population (2.8% or 15% of China’s). Its population density is moderate like the US and it has a population almost as young as India. Brazil has great potential for tourism and agriculture, once it can overcome its problems. Corruption is slowly being controlled and after recent political upheaval settles, they might enjoy an Olympics dividend and use it to improve their weak infrastructure.
Mexico is more accurately Central America but proximity to the US market should work in its favour aided by its conservative financial management and labour-market policies. Wage growth has lagged China, so its labour is now 20% cheaper enabling recovery of some manufacturing market share lost to China in the mid 2000s. Mexico’s future also looks bright if it can stay committed to reform and economic transformation, while controlling political corruption and drug violence.
What does this mean for Investors?
The outlook for these emerging markets remains cautiously optimistic for long term investors. Emerging market currency factors are healthier than before and though investment caution is warranted, there are attractive opportunities for prudent, patient investors prepared to take a long view. Will emerging markets fall further before they recover to justify an investment? This can’t be known in advance but a ten year view is likely to be well rewarded.
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Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. So you should not rely on it and seek personalised professional advice before making any decision.