FOR MUCH of the last two decades, the Chinese economy has astonished investors and worried politicians. Growth of an average of 9.3 per cent has been driven by an astonishing bout of domestic investment. But it has also been helped on by an immense “demographic dividend”, engineered by the country’s one child policy.
But with inflation now creeping into the Chinese economy, and some speculation that the cheap labour might be running out, the next decade might not be quite so buoyant. So where else can investors look?
Immediately south of China seems wise. While China’s population is fast aging, its neighbours Vietnam, India and Indonesia all have fantastically young workforces.
By one estimate, some 70 per cent of Vietnamese will be of working age by 2018 while 65 per cent of Indonesians will be. Similarly, by 2020, the average Indian will be 29 years old – compared to 37 in China. That youthfulness ought to increase savings rates, helping governments to build infrastructure and drive up growth rates.
Vietnam is a particularly interesting prospect. Investor confidence has suffered recently, not least thanks to an unfortunate default last month by the state owned shipbuilder Vinashin. But over the long term, there are a lot of reasons to be optimistic about Vietnam.
According to Kevin Snowball, chief executive of PXP Vietnam Asset Management, which manages two Vietnam based funds, Vietnamese equities are “are now selectively very cheap on an absolute, historical and relative basis”.
Snowball notes that investors have been discouraged by high inflation, a weak currency and a trade deficit. But he argues that structural trade deficits in countries building modern industrial economies are perhaps inevitable and largely the result of productive imports. And inflation figures are magnified by the high weighting of food in the Vietnamese CPI basket.
Eventually, Vietnam’s young and well educated population, as well as its comparative export competitiveness (manufacturing wages are half equivalents in China) should keep growth strong, while the Vietnamese government’s need to attract investors will lead to further opening up of the economy to outsiders.
MIDDLE CLASS CONSUMPTION
But if the instability of Vietnam is too much to bear, India is also much better placed demographically than China. Tarun Ghulati, the CEO of UTI International, which manages the UTI India fund, argues that not only is India’s population young, it is also ambitious.
Ghulati points out that “the high propensity to consume among the young population and the growing number of wealthy individuals will ensure that India continues to show strong growth over the next decade.” As America grapples with the prospect of rebalancing away from import dependence, China’s export strength may become a weakness, while India’s domestic driven growth shouldn’t.
Increasing middle-class consumption ought to drive growth in Indonesia too. Since the resignation of the strong man President Suharto in 1999, Indonesian politics has been getting progressively more stable and investor friendly. The Indonesian government passed an investment law in 2007 designed to attract foreign funds, and it is currently engaged in an anti-corruption battle.
According to Dhananjay Phadnis, manager of Fidelity’s Indonesia Fund, further reform, especially of infrastructure, could raise growth from its current level of around 6 per cent per annum to a rate closer to 8 or 9 per cent – which ought to appeal to many investors.
The emergence of huge, new economies outside of the developed world is clearly going to continue. Undoubtedly, China will keep growing. But with a multitude of other large countries experiencing the magical combination of a demographic dividend and a helpful government, the next big investment story is less likely to be China than it is one of its neighbours. Investors would do well to consider that.