The Alquity Asia investment team have just returned from a two-week investment trip in Southern Asia. Here, Mike Sell and Aaron Armstrong describe the compelling investment case they see evolving in Bangladesh.
Understandably, for years many investors have overlooked Bangladesh. A history of military takeovers has often created a volatile political environment, whilst industrial accidents and natural disasters have damaged the country’s international reputation as an investment destination.
Now, after five consecutive years of GDP growth above 6.0%, Bangladesh is beginning to emerge as an unsung growth engine of the Indian sub-continent. The urbanisation of a youthful, increasingly literate, population is driving a broad based surge in domestic economic activity, manifesting itself in indicators from exports growth to life expectancy.
Getting our hands dirty
There is no substitute for first-hand experience when trying to gauge investment potential. On the ground in Dhaka, we explored the potential of the unfolding consumer story. From local street vendors to a mega mall (complete with a full-sized rollercoaster) we observed local tastes and cultural nuances, as well as the traditional hard facts of prices and volumes.
Whilst income per capita in Bangladesh doubled from $517 in 2006 to $1179 in 2014, the Bangladeshi consumer is still poorer than many of his Asian counterparts. Half of the population still lives below the poverty line as defined by the World Bank. With a population of 156 million, poverty is still weighing on the economy significantly. As more Bangladeshis are lifted from poverty through inclusive economic growth, this will create the consumers of tomorrow.
The key to Bangladesh’s long-term economic future lies in its workforce. With 57.9% of the population under the age of 25 and 85.2% under 45, this economy’s demographic dividend is set to compound for many years to come.
Next story, not the last
Readymade garments (RMG) came to dominate Bangladesh’s economy since the turn of the millennium. Over 80% of exports currently come from the RMG sector, with the industry providing a key source of foreign exchange reserves and keeping the current account in surplus during the years of rapid economic growth.
An industrial tragedy shocked the world in 2013 when an eight story building housing an RMG factory collapsed killing over 1,000 people. Domestic and international outrage accelerated the introduction of key labour reform bills to improve working conditions and employee safety.
Issues such as employee health and safety should be an integrated part of investor’s decision making process in the country. We feel this additional layer of analysis is crucial in emerging and frontier markets for delivering long term returns to investors, by identifying well-run companies that operate sustainably and not to the detriment to their local environment and communities.
Whilst the RMG industry is beginning to recover from this tragedy, and export growth has bounced back, the economy is beginning to broaden. Diversification across new industries is set to become a key catalyst for growth over the next five years. We see some of the greatest investment opportunities emerging in infrastructure, financial services and manufacturing.
A bumpy road
Much like many of the streets we drove through in downtown Dhaka, Bangladesh’s political outlook appears bumpy at best. The complex and uncertain politics will remain a significant challenge to Bangladesh’s progress. Outbursts of unrest have historically correlated with election years, however in 2015 we have seen blockades and general strikes sparked by the one-year anniversary of the widely boycotted 2014 general election. This overarching instability is unlikely to change. However, the fact that these disruptions have been ever present during Bangladesh’s period of rapid economic expansion suggests that they are unlikely to derail progress in the future.
Bangladesh remains the Indian sub-continent’s undiscovered story. Investors are, quite rightly, flocking to neighbouring India, but are overlooking a vibrant, young democracy with enormous investment potential.
Mike Sell is head of Asian investments and Aaron Armstrong is an investment analyst at Alquity
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