Southeast Asia's Rising Middle Class

As recession-battered consumers in the West cut back on spending over the past two years, export-based economies in Asia suffered.  China, Japan, and Korea, traditional bellwethers of global trade flows, experienced increased volatility and below-average growth as exports precipitously decreased.  As the economic outlook remains subdued for 2013, investors’ eyes will continue to turn to south East Asia in order to acquire higher yield over the near-term.

Robust economic growth in the region is one of the main reasons triggering this shift.  While economic growth has slowed or remained stagnant in other parts of the region, south East Asia has remained buoyant: Indonesia posted 6.5% growth in 2011, and is on target to post 6.3% growth in 2012; Thailand, even after suffering a devastating flood in 2011, will likely hit growth near 4.5% in 2012; Malaysia is tapped to replicate its 2011 growth of 5.1%. The performance of these key South East Asian economies, plus the added liberalization of the Burmese and Laotian economies, has led to an increasing inflow of money over the past year.

Overall growth, however, is only part of a larger, long-term investment thesis South East Asian economies looking to 2013 and beyond: a growing middle class will stoke already vigorous growth in highly populous countries.  Domestic demand already accounts for a higher proportion of GDP growth in these countries than other emerging markets: Consumer demand roughly accounts for 55% of Indonesia’s GDP; it accounts for nearly 50% of Thailand’s growth.  Some investors posit that as economic growth continues in these countries (including the new entrants)  a virtuous circle maybe achieved in that countries with strong domestic demand will continue to grow along with the middle class.  This would be substantial as Indonesia’s population of 240 million, Thailand’s population of 70 million, and Myanmar (Burma)’s population of 50 million would constitute a solid consumption bloc for many years to come.

Of course, there are palpable risks to this forecast.  Political instability is a large factor.  Thailand, a country long suffering from the disparity between rural and urban areas, still has not settled the numerous scars from former PM Thaksin  Shinawatra’s rule.  Indonesia will also continue to face strong political opposition to the weaning of consumers from energy subsidies.  There are certain to be many bumps in Burma’s attempts to open its economy to outside investors and Laos’s accession to the WTO. Overall, however, compared to the volatility and economic stagnant growth that is still the norm across many developed and developing economies, southeast Asia offers the prospect of higher yields for numerous years to come.