News headlines in the last nine months have been dominated by Brexit and Trump. In my view, that’s understandable given the uncertainty and potential implications for the global economy which those two events have precipitated. However, I also believe investors are failing to give enough attention to an obvious growth opportunity which can easily be accessed.
That opportunity is the Asian economy. Although the GDP growth rate in China has fallen in the last few years, there is a tremendous growth opportunity within consumer products and financial services. Personal wealth across Asia is rising, and companies such as Prudential (LON:PRU) are capitalising on it. Just this week it reported its 7th consecutive year of double-digit profit growth in Asia. As well as a low valuation and dividend potential, this could propel its share price higher, in my view.
While practically all investors are well aware of the potential growth opportunity in Asia, its attraction seems to have dampened to some extent in the last few years. China’s ‘soft landing’ may have caused a decline in market sentiment towards the Asian economy. However, it continues to offer growth rates which simply cannot be matched in the developed world. For example, China’s GDP is forecast to grow 6.6% this year, versus 2.1% for the USA and 2% for the UK. Even by 2020, China’s GDP growth rate is forecast to outstrip the USA and UK’s growth rate by 3.8% and 4.8% respectively.
Even though China’s GDP growth rate is falling, personal wealth levels are forecast to rise. This forms part of a wider attempt by the country to transition from an infrastructure-led economy towards a consumer-focused economy. Partly as a result of this, wages are expected to rise by 46% between now and 2020. This is forecast to stimulate growth in a number of industries, including financial services, where demand for products such as retail banking, life insurance and investment management is likely to soar.
The opportunity within financial services industries is not driven solely by increasing wealth. An ageing Chinese population could also impact on demand for financial services products. Between now and 2030, China will gradually become the world’s most aged society. By 2050, over 30% of Chinese are forecast to be classed as senior citizens. Therefore, the prospects for the life insurance industry, healthcare insurance and other financial products could be very bright in the long run.
Capitalising on potential
Prudential is one company which is already capitalising on the growth opportunity within Asia. Its 2016 results which were released this week showed its Asian operations continue to be the main catalyst behind its rising sales and profitability. In Asia, Prudential registered operating profit growth of 28% in 2016. This helped to pull up the rest of the company’s performance, leaving operating profit growth of 7% for the business as a whole.
Prudential is the leading pan-regional franchise in Asia and holds the top-three positions in nine of its 12 life markets in the region.
Prudential’s opportunity for further growth in Asia is extremely strong in my opinion. It is the leading pan-regional franchise in Asia and holds the top-three positions in nine of its 12 life markets in the region. It is also the number one Asian retail asset manager. Much of the demand for financial products is unmet, in my opinion, with mutual fund penetration rates only 12% in Asia compared with 75% in Europe and 96% in the US. There is also a significant mortality protection gap which may provide a growth opportunity for Prudential.
In order to capitalise on its growth potential in Asia, Prudential is investing in distribution capacity and innovative products. For instance, its distribution network in Asia has become more productive, with average case sizes increasing by 30% in 2016. It has more than 500,000 agents across Asia and access to over 10,000 active bank branches through a total of three regional, five strategic and a variety of local partnerships. In my view, this should ensure the company maintains its competitive advantage over rivals and is able to fully exploit the growth potential of the Asian economy.
In tandem with this, Prudential is also launching new products in Asia, such as an online community portal and a DNA-based health and nutrition programme. In my opinion, they could help to improve product differentiation in what could become an increasingly competitive marketplace.
In spite of this clear growth potential in Asia, Prudential has a P/E of 13.3. Its EPS is forecast to grow 14% this year and 8% next year. I believe there is more growth potential beyond next year, which I feel makes its shares good value for money. A dividend payout ratio of 33% indicates either significant dividend growth, large reinvestment for future profit growth, or a mixture of the two may lie ahead. Therefore, although Prudential yields only 2.5% at the moment, there is potential for dividend growth which may make up for the relatively low initial yield.
While Brexit and Trump may dominate news headlines in future months, I think the real opportunity for investors is still in Asia. Its major economy, China, may be undergoing a transition as it moves towards being increasingly consumer-led. This means a lower rate of GDP growth and the potential for some friction along the way. However, with an ageing Chinese population and rapidly growing wealth, rising demand for financial services products such as life insurance is likely to remain in place in the long run in my opinion.
Prudential is taking advantage of this growth opportunity. Its business is being driven largely by gains made in Asia, with the company’s dominant position allowing it to fully capitalise on growth opportunities. Further investment in its product line and logistics should help to cement its position in my view. I feel its current valuation and income potential indicate investment appeal for the long run. Therefore, its shares could move higher regardless of how Brexit and Trump’s Presidency turn out.