5 November 2010
The Asian 21st Century
Australians have long heard how our culture and outlook has been shaped by the 'tyranny of distance.' As a predominantly European outpost located at the edge of Asia and the Pacific, we have apparently always been at the fringes of international development and the world economy. Today, however, the picture looks vastly different. Our geographic position is turning from a burden into our biggest advantage. Investec strategist Michael Power recently presented a provoking survey on the shifting of the world's economic centre of gravity from the Atlantic (Europe and the United States) to Asia. In this edition of Investment News, we present some of the more startling facts and conclusions.
The return of China
Until 1830, China was the largest economy in the world. At that point, England took over and commenced what is likely to be a two-century hold on the top spot by Anglo-Saxon nations (the 'Anglo-Saxon Interruption'). First, the United Kingdom held the number one spot from 1830 until the mid 20th century. Then the United States took centre stage.
With the benefit of hindsight, that period of Anglo-Saxon dominance was never going to last indefinitely. Things are now changing at a speed that is difficult to comprehend. In 2005, Chinese President Hu Jintao announced that China was planning to quadruple its GDP to US $4 trillion by 2020. As it turns out, even this remarkable prediction was well short of the mark. By 2009 - just four years later - China's GDP was an estimated $4.9 trillion. By August 2010, China had overtaken Japan to be the world's second largest economy.
So when (and most commentators regard the appropriate question as 'when', rather than 'if') will China overtake the US? Honestly, the situation in Asia is so dynamic that predictions and projections are generally out of date before they are published. Investment bank Goldman Sachs has predicted that China will overtake the US as the world's largest economy by 2027. However, if the Chinese currency, the renminbi, appreciates by just 4% per annum over the next ten years, the gap would be closed by 2020.
This growth provides massive improvements in the standard of living for the Chinese people. To take one example, it has been estimated that, between 2005 and 2025, China's middle class will increase in size by 1200%. Moreover, such extraordinary growth brings with it an enormous appetite for commodities. There are roads to be built, power stations to be fueled, cities to be constructed and so on. All this is good news for a commodity exporting nation like Australia.
The emergence of India
Meanwhile, although not attracting the same level of attention, India is poised for its own economic miracle. By 2015, India is projected to be growing even faster than China. Between 2015 and 2045, the Indian middle class is predicted to grow by 1500%. Goldman Sachs even predicts that India will overtake the US to be the world's second largest economy (behind China, of course!) by 2040. Perhaps even more significantly, 30% of the world's children are Indian.
One likely result of this is that the Indian Ocean could revive as a key centre of world trade. With a crescent of nations including India, Australia, Indonesia, Thailand, Bangladesh, Pakistan, the Middle Eastern oil nations and the African east coast down to and including South Africa, the Indian Ocean nations present an imposing combination of natural resources, labour and capital. Advantageously for Australia, they also have a critical mass of English-speaking (even cricket playing!) nations.
And that's not all ...
To the growth stories of China and India, add the other emerging Asian nations: Indonesia, Vietnam, the Philippines and so on. All have large and young populations. All are looking to move into the developed world. All will need plenty of resources - iron ore, coal and so on.
These economies are likely to be the engines of world growth for the rest of our lifetimes. Australia is uniquely and fortunately placed to benefit. We have abundant natural resources, all of which are in demand. We have a mature and stable legal system, providing certainty for investors. Finally, we have the geographic proximity to the centre of the world's economic engine.
Provided we manage it properly (always a big 'if'), the 21st century is likely to be an outstanding one for savvy Australian investors.
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Head of Funds Management
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Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.
La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.
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