Fund manager view: Asia’s new middle class gets mobile
For much of the past 30 years, the standard global investor’s take on the Asia Pacific (ex Japan) region has been to see it as a series of simple emerging market plays. Rapidly industrialising manufacturing powerhouses suck in resources from their nearest commodity-rich neighbours and spit out cheap goods to export to Western markets, generating profits for the companies involved.
While the fundamentals of this story remain in place, Asia is changing. Yes, relations with the West are still a big factor for its economies, but increasingly important today are the links between its constituent countries. Services account for a growing slice of trade between the countries of Asia, and one of the fields, which I feel most clearly – and most investibly – illustrates this change, is tourism.
Rise of the middle classes
The rapid, ongoing growth of the Chinese middle class has produced a veritable boom in overseas tourism as the aspirations and horizons of the newly-affluent expand beyond their domestic borders. A huge and sustained surge in Chinese travellers over the past five years has seen the country become the world’s second-largest tourism market, accounting for half of the growth in the world’s travel industry.
Its tourists have money to spend on travel itself, as well as on goods and services at their destinations, and the new wave of tourism has been a huge boon for the businesses able to adapt and capitalise on it. In Macau, casino operators catering to high-end tourists as well as the mass market have come through a recent lull to generate very healthy returns. Airport operators and other travel infrastructure businesses that serve the region’s most popular tourist destinations continue to see significant growth in passenger numbers, while within retail, mall operators and owners have been able to profit from surging tourist trade at the best positioned retail properties.
A new model down under
Less obvious forms of tourism are also shaping the way money flows between the countries of the Asia Pacific (ex Japan) region. As China brings to an end the particularly high-growth phase of its industrialisation and moves towards a consumption-driven economic model, its demand for metal and other deposits from nearby countries, notably Australia, has waned. But for Australian businesses, a counterbalance to this decline has come in the education sector. In an increasingly competitive Chinese employment market, one of the key concerns among the new Chinese middle class is quality of education. And with a high-quality Western education available across the South China Sea at Australia’s public and private education institutions, Australia has seen a huge influx of Chinese students – and Chinese wealth. Education has in effect become one of Australia’s invisible imports.
Another of the key concerns for the newly-affluent and newly-mobile in Asia is healthcare, with differing standards of state healthcare provision across the region creating a growing market in health tourism. Increasing demand for offshore healthcare options has prompted the construction by healthcare companies of private hospitals in key locations close to population centres and I believe the best of these projects may be well placed to help these businesses to generate strong long-term returns.
Is the tourism boom here to stay?
Chinese tourism is in a period of extremely rapid expansion that has seen it become the world’s second largest tourism market and it currently contributes half of global travel industry growth. Can its growth be sustained? I believe the short answer is yes. China’s new ‘affluent mobility’ is here to stay and is likely to fuel further growth in specific sectors.
For instance, despite the growth we have already seen in tourism in China, the penetration of outbound travel within the domestic population remains incredibly low in comparison with other markets. The number of overseas trips per citizen per year still averages just 0.09 in China, versus 0.3 trips in the US and 1.2 trips in the UK. Recent analysis from CLSA estimates Chinese tourism expenditure is likely to grow at 20% annually for the next five years, fuelled by rising disposable incomes, relaxed visa policies and rapidly expanding flight networks.
This is a view I share. I believe Asian tourism is a structural growth story, and in terms of investment strategy within the Jupiter Asian Income fund, that means I approach it with a long term perspective. Across a wide range of sectors, we are able to identify and invest in a number of high-quality businesses with the management teams, business models and market positioning that I believe will allow them to capitalise on Asia’s thriving tourism story in the coming years.