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The rise and rise of Asia’s middle-class

East Asia’s middle-classes are set to number over 3 billion by 2030. How is this rise being facilitated and what does it mean for global demand dynamics, from gold to mortgages to holidays?

The OECD projects that the world population will grow to over 8.2 billion by 2030 and that China and India will be home to roughly two thirds of the global middle-class. By then, some estimates suggest Asian-Pacific (APAC) countries will have seen a growth in their middle-classes by over 500% in the 20 years up to 2030, compared with 2% growth in Europe and a decline of nearly 5% in America. In 2011 the total number of middle-class in Asia overtook the total in Europe. There are now around 1.5 billion middle-class in Asia, all demanding higher standards in their lives for food, energy, tourism, hospitality, education, healthcare, luxury goods and property.

The growth in the Asian middle-class has in recent years been particularly noticeable in China, but it is the developing nations in Asia that are making their presence felt: GDP growth for countries such as India, the Philippines and Vietnam outstrips the rest of the region at 6-7% annually. In developing Asia, the higher spending segment of this group of people, or ‘upper-middle-class’, now numbers about 150 million and is expected to easily grow by 100 million or more in the next few years as an accelerator phenomenon takes effect. This surge in numbers has already been observed in China and the most aggressive growth is now being seen in Indonesia and Vietnam, although in terms of the percentage of the population Thailand and Malaysia are leading.

Seeing it first hand

On a visit to developing Asia, say Manila, you notice most cars that pass you are new (including the odd Ferrari or Lamborghini), likewise in Ho Chi Minh where the new part of the city now has the tallest skyscraper in east Asia, surrounded by thousands of new apartments blocks. However, one observation you can make from afar is that more and more Asian are enjoying their new wealth via travel: it’s not difficult to see more and more far-flung Asian tourists appearing.

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Thirty years ago, the Japanese were enjoying similar prosperity and queued outside Louis Vuitton in Hong Kong and invaded Hermes in Paris, now the Chinese have taken over. When venturing out of Hermes with a coveted purchase, you are most likely to be approached by a Chinese scalper who will bid for the newly sewn handbag – and to fill the demand-supply gap the Japanese are gleefully selling their inventory of mostly unused vintage brand goods at a profit through tourist targeted stores around the country.

Japan's busy Akihabara district

Japan’s busy Akihabara district

Emerging South East Asia is putting itself economically back on the map again after a 300-year absence when Western Europe and America became fabulously wealthy through the 1700-1900s, leaving Asia far behind. The Asian Tiger economies of Hong Kong, Singapore, South Korea and Taiwan were the first to make the comeback following the rapid industrialization throughout the 1950s and 60s and then followed China through the 90s and 2000s, these economies have now entered a maturing phase. In the 60s and 70s toys, clothes, pots and pans used in the West were often ‘Made in Hong Kong’, today Hong Kong makes nothing except money and consumers, almost a third of whom annually go to Japan for a holiday. Now it is the consumers of the Tiger Cub economies of Indonesia, Malaysia, Philippines, Thailand and Vietnam that are making their presence felt.

Vietnam - about to make its economic presence felt

Vietnam – about to make its economic presence felt

As incomes rise and the number of households entering the middle-class rises, goods and services that are purchased go further upmarket. After buying the first TV, smartphones for the family, a car and the first holiday abroad, typically an income earner on $20,000 – $25,000, will turn towards financial products and ways to ensure their future security. This bodes well for the development of the financial markets in emerging Asia that have historically seen little demand for the basics such as creditcards, mortgages, savings plans or ways to store value in something other than local cash or dollars. In time this will filter into equities, bonds and non-local currencies including gold.

Gold, Dollars vs. Local Currencies

The volatile nature of the emerging markets currencies means that locals need to think in two currencies, historically this has been their own currency and the US dollar – just ask a taxi driver in Jakarta what today’s rupiah rate is, he’ll know to the penny and will likely accept dollars, giving change in local currency, something a London cabbie would not do.

Gold is a popular store of value around Asia: China and India are the biggest consumers of gold globally, the Japanese stash gold (it’s compact and doesn’t burn) and you can buy bullion from shops in Hong Kong. Indeed, gold’s transportability has seen a smuggling out of Hong Kong in recent years.

Feeling the strain

As tourists start to travel further, the long-term prospects for businesses facilitating this new-found wealth and demand for property, goods and services are promising. The new middle-class are relatively young and have a high familiarity with e-commerce: for example, in China, cash is dead and at US$5 trillion annually, the e-payment market now accounts for 42% of the world’s e-commerce transactions. The upper-middle-class in China and Asia have become comfortable users of credit cards and until the recent clampdown, innovative systems such as cryptocurrencies.

Old Shanghai is as busy as new Shanghai (top)

Old Shanghai is as busy as new Shanghai (top)

New legions of financially savvy global travellers will be a boon for the tourism sectors of destination countries but they are starting to suffer from too much of a good thing. The rapid rate of increase of these newly minted travellers is starting to strain resources and the patience of the locals in destination countries. In Hong Kong, shopping malls have had to be shuttered during peak times to avoid fights in stores over goods, while Australia and Western Canada, where many wealthy Hong Kongers previously fled, have imposed restrictions on the new waves of tourists, particularly with respect to buying property. In Japan the near three-fold increase over the past 12 years in tourists from Asia has put a severe strain on budget accommodation, public transportation and the supply of popular goods. Ask an average resident of Kyoto and they’ll tell you the city can’t cope any more, public transport is so overburdened you can’t get on a bus to go to work.

Population growth in these countries will propel this further. The Philippines, for example, will see about 2.5 million babies this year, born to millennials who have a growing interest in better, more comfortable lives with higher incomes. This ensures the long-term growth of this powerful Asian consumer base, they are here to stay and we will need to adapt worldwide.

Neil Newman is an Asia business development expert and contributing analyst for Gavekal Research Limited

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The rise and rise of Asia’s middle-class

gold brain

Following the World Gold Council’s report on the outlook for gold over the next 30 years we detail the core reasons why gold will gain between now and 2048

1.) Global Growth

Simply put economic growth is good for gold. Over the next 30 years the world’s economic growth will continue to be driven by China and India, two huge countries and economies that are already the world’s largest consumers of the yellow metal.

By 2035 estimates suggest China’s GDP will reach $63 trillion, giving it over a quarter of the global economy. It could then grow to a phenomenal $160 trillion by 2050, giving it 30% of the global economy. One estimate even suggests Chinese GDP per capita could reach $120,000 by 2050, twice the global average.

China will continue to grow, as will Chinese demand for gold. Photo: Jakob Montrasio

China will continue to grow, as will Chinese demand for gold. Photo: Jakob Montrasio

Likewise, India is set to become the world’s fastest growing economy with average growth of between 5% and 6%. By 2048 per captia income could reach $38,000 and the population could top 1.7 billion, 70% of that number being middle class.

This growth is in line with rising gold consumption in both economies. Last year India has saw an increase in its gold supply of 57%, with total supply being over 1,000 tonnes. Meanwhile the Chinese Gold Association reported a 9.4% increase to 1,089 tonnes.

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2) Technology needs gold

Technological growth and innovation is changing the world, something facilitated in no small part by gold. Recent years have seen a rise in the importance of gold, not only as a store of value but as an important industrial material in its own right.

Gold is malleable, highly conductive and corrosion resistant. As a result it has assumed a critical role in the electronics industry. The World Gold Council’s 2048 report details how “practically every item of electronic equipment contains a small quantity of gold, including the most recently released smartphone technology. Gold nanoparticles (tiny particles of gold many thousands of times smaller than the width of a human hair) are also widely used in the healthcare and clean technology sectors, thanks to their unique properties and cost-effectiveness. We believe gold will continue to be at the heart of research and development (R&D) programmes around the world and help to tackle many of the challenges we face in 2048.”

The rise of the electric car depends on gold

The rise of the electric car depends on gold

As electric vehicles become the norm, gold will also enable the mass production of hydrogen fuel cells and high-spec electric vehicles. As investors look to finance the continued drive for improved electronics they will be funding demand for gold. “Gold remains the material of choice for a variety of applications across the technology space. That is expected to continue and evolve over the coming decades,” states the report.

Additionally gold is set to have a growing role in healthcare technologies and improvements.

3) Gold will get scarcer

While demand for gold will grow, supply is unlikely to keep pace – pushing up the gold price significantly. “The rate at which gold is being discovered has declined over the past three decades, even though exploration budgets have risen almost continuously since the early-2000s,” writes Mark Fellows, head of Mine Supply at Metals Focus in the World Gold Council report.

Gold mining faces an uphill struggle

Gold mining faces an uphill struggle

Although production of gold at the current rate would see a further 97,000 tonnes of gold added to the 190,000 tonnes currently in existence from mining, extractors face costing pressures as the price of mining rises by around 10% a year. In addition to this is the fact fewer “world class” mining sites are being discovered, further depressing the appetite to extract gold. Gold will come from a larger number of smaller operations – or supply will shrink drastically if this is not feasible.

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“Although the industry can sustain production around current record levels for the next few years, global mine supply looks set to enter a period of secular decline over the longer term,” says Fellows.

4) Inflation is coming

Current forecasts suggest Japan, Europe and the US face real challenges when it comes to inflation. In the UK alone, current inflation sits around 3% while growth is around half that. Gold by contrast has, on average, gained in value by 8% annually since over the last 10, 20 and 50 years.

Following the current historic low growth and low interest rates there is an increasing belief that inflation will rise significantly as central banks begin to stop printing money and start ticking up their rates – something already seen in the US and the UK. Twinned to this is the growth of aging societies in the West with smaller working populations.

Inflation is set to rise, eating away the value of savings

Inflation is set to rise, eating away the value of savings

Economist George Magnus questions the viewpoint that less dynamic societies mean low interest rates: “According to IMF researchers, the larger the proportion of children and older citizens in the population, the greater the likelihood of higher inflation. The argument is that different age groups have different consumption and savings patterns, which affect inflation.”

If more people are consuming, rather than producing there is a real risk inflation could rise. “As age structure changes again in the future, we should not be surprised if inflation rises again, pushing bond yields up. It will then be up to central banks to determine whether to accommodate it with a slower rise in interest rates or curb it by pushing policy rates up more firmly, and, by implication, long rates too. Either way, the falling and low real rates of the past 30 years may be drawing to an end.”

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5) The certainty of currency uncertainty

How geopolitical uncertainty effects markets has been an ongoing theme over the last few years. While this has had a noticeable effect on the gold price, the next 30 years could see gold gain in value significantly as the dollar loses its global hegemony and the Eurozone continues to struggle.

Keeping its value

Keeping its value

In addition to currency fluctuations “anticipation of – and reaction to – economic downturns and financial crises are likely to buoy investment demand [for gold] for many years to come,” says the World Gold Council’s chief strategist and head of research, John Reade, pointing to the elevated valuations of many asset markets, large debt levels in many economies and unresolved structural problems dating from the 2008–09 global financial crisis. Climate change will also play a part says Reade, as the global economy is increasingly affected by destructive weather events which drive the need for the insurance of safe assets such as gold.

The World Gold Council’s Gold 2048 report can be found here

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This article does not constitute investment advice and should not be seen as such, it is based on observations based on published research.

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