Churchouse Letter
January 2013          by Peter Churchouse

Secular Forces Will Trump the Cyclical in Asia Hard Assets Markets

Inside This Issue:
The “Asia Big 6” countries will present a 7.6 billion square meter (82 billion square feet) urban hard asset opportunity over the coming decade. How to play this huge surge?
The Christmas gift that keeps on giving with returns many multiples over original outlay.
A D.C. date with an American icon, General Colin Powell. Asian countries could do well to take a leaf from the U.S. justice system playbook.
Portwood Portfolio: adding to our tech stock, and opening a new position on a company for our core long-term portfolio.

Financial and asset markets around the world are very much caught up in the constant round of Quantitative Easing, money printing, one crisis following another, and the fiscal cliff. Investors (or at least those that follow the media) can be forgiven for finding it difficult to keep up with events, eliminating the noise, and keeping focused on what is most important for them. Markets oscillate from one prevailing sentiment to something opposite in more frequent intervals than we have seen before in recent memory. Risk on, risk off sentiment seems to change on a monthly basis. Even though Asian markets are not directly in the line of fire in this current round of crisis events - remember, they had their day in the 1997 to 2003 period - they are experiencing significant fundamental impacts of the policy initiatives emanating from the west.

Western money printing is presenting unwelcome impacts in many parts of Asia.

Most particularly this is showing up in liquidity injections and withdrawals that are very much a product of financial easing in North America and Europe. It is not overly difficult to understand. With Europe facing further recessionary conditions, and the US facing sub-par growth at best, and possibly a slide back into recession, Asia, as the fastest growing major region in the world today looks like a relatively good bet for allocation of at least some of the river of liquidity that is pouring out of central banks in the west.

Western Quantitative Easing Proving Problematic for Many Asian Countries.

Asia does not really need this liquidity at this point of the cycle. However it comes nonetheless, and is finding homes in many sectors, most notably in real estate and other hard asset markets. While European and US central banks are desperate to turn declining real estate and asset markets out of their torpor, Asian policy makers are trying to slow down the rate of asset price inflation that the external liquidity flows are underpinning in many Asian markets.

Cyclical forces are one things but Asia is experiencing secular forces that will present big opportunities in regional hard asset markets over the coming decade.

While these cyclical forces are creating relatively short term gyrations in asset markets, we tend to forget that there are some underlying, fundamental secular forces at work that will shape the opportunities in Asian hard assets markets over the coming 10 to 20 years. These forces are powerful and will present companies in the sector with very powerful growth opportunities stretching over as much as a generation. These forces are demographically driven, but will be supported by the generally higher growth prospects that many countries in the region are likely to enjoy over the coming decade. In the short term, the low interest rate environment also plays a substantial role in these businesses.

Urbanisation - a Secular Trend, not Cyclical, and a Driver of Huge Opportunity in the Coming Decade.

At its most basic level this process will be driven by population growth and most importantly by the secular trend of urbanisation. Here we take a look at these trends for the "Asia Big 6" countries in population terms with a view to identifying in broad terms the potential needs/demand for housing in urban areas in these countries over the coming decade or so. The scale of urban housing demand will give some dimension to the scale of opportunity facing the larger developer companies in the region as well as related industries such as steel, cement, other basic commodities, household goods/white goods. And of course, the increase in urbanisation will give rise to substantial development needs for urban infrastructure such as roads, public transport, schools, hospitals, hotels, recreation, retail facilities - the list goes on. These forces should enable a great many companies in this process to deliver average annual earnings growth well into double digits over the coming decade.

The "Asia Big 6" includes China, India, Indonesia, Philippines, Thailand and Vietnam - the six largest countries in population terms.

Continued rapid urbanisation is an inevitable by-product of economic transformation of the region.

We need to remind ourselves that these trends are secular, not cyclical, but of course will be influenced by cyclical forces that may shape the pace at which the trends will take place. For example, the ability to fund such development will likely influence the pace of achievement of these trends. This in turn may be influenced by underlying economic growth rates, interest rates, savings rates, public policies.

Population growth has slowed dramatically over the past 60 years, nowhere more so than in India.

We are all aware of some fundamental differences in population growth trends in the Big 6. China's population growth is relatively slow as a result of its one child policy, while that of India, Indonesia, Philippines is much faster. We can summarise some of the basic demographic trends and characteristics of the Asian Big 6 as follows.

  • Population growth rate amongst Asian Big 6 countries is lowest in China at 0.51% per year at present, versus the Philippines producing the most children with a growth rate of 1.73% per year. India's population growth rate is almost three times greater than that of China (see Figure 1 below).
Re-producing at Ever Slower Rates

China’s one child policy puts it right at the bottom of the heap in population growth in the “Asia Big 6” countries.
  • Population growth rates have fallen significantly in all parts of the region from the early 1950's, as they have for the world as a whole. China's population growth rate has fallen by around 75% while that for India has fallen by only about 20%.
  • Population peaks will be spread over about 65 years for Asian countries, with China's population peaking soonest at around 2025 and India around 2060, with a total population of 1.7 billion, about 23% greater than China (See Figure 2).
 
Populations everywhere are aging but at very different rates.By 2020 China’s median age at 38 years will be very similar to that of the U.S.
  • Asia's population is aging, but at very different rates, and with very different median ages. For example, by 2020 the median age of the Philippines population should be around 24, for India around 28, and for China around 38, the highest in the Asian Big 6, and similar to that of the USA. (see Figure 3).

Populations Graying Almost Everywhere

 
China = U.S. by 2020 for median age of population........but will be much older going forwards.
  • The bulge in Asian population age/sex pyramids is rising pretty much universally around the region. For example in China the "bulge" group rises from age group 20 - 29 in 1995 to 45 - 54 by 2020. For India, with its significantly higher population growth rate, the age group under 15 is still the dominant group, and will continue to be so by 2020, but with the age groups immediately above very similar in numbers (Figure 4).

The Bulge Bracket Moves North

China and India represent a case study of demographic contrasts.
  • Lots more people to care for. Dependency ratios (proportion of people under 19 and 65+ as a percentage of those between 20 and 64) will rise sharply in China, starting pretty much now, but much less so for higher population growth countries such as India and the Philippines (Figure 5).

Fewer People Caring for More.

Dependency ratios (young + old as a % of working age population) are nearing their low points and will rise from here.This points to growing needs for education (in “younger” countries) and welfare, healthcare for retirees (China).

Population growth rates may be slowing in the region, with population in China peaking out in the coming decade or so, but changes in the economic structure of countries is driving more people from the countryside to the urban areas, bringing with it very substantial needs for development of urban infrastructure, most notably housing.



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