Executive summary
Asia will continue to be the fastest growing region in the world as new drivers emerge, providing greater investment opportunities and diversification for investors. In “New Asia”, as the gap between winners and losers widen, active management and local knowledge will be even more important.
Asia accounts for half of the world’s population and almost half of its GDP. It made up 50% of the global consumer class in 20201 and accounted for 55% of global internet users in 20212. The region is forecast to grow by 5% in 20233, making it the fastest growing region in the world.
As Asia consists of both high-income and emerging economies, new growth drivers such as digitalisation, supply chain realignment, technological innovation and regional partnerships will play out differently across the region, creating exciting opportunities for investors.
Digitalisation - It is estimated that 60 million people in Southeast Asia became online consumers during the pandemic4. Digital adoption is accelerating, spurred by the region’s high smart phone penetration rates, mobile-savvy youthful populations, heavy investments in digital infrastructure and supportive regulatory frameworks.
Supply chain realignment - Geopolitical tensions and the COVID-19 pandemic have led multinational companies (MNCs) to seek more resilient supply chain networks. Vietnam’s and ASEAN’s shares of US container imports have risen since the start of the US-China trade tensions. India has also benefitted from increased manufacturing demand from Apple.
Technological innovation - Asia’s relatively youthful and technologically savvy population as well as its strong work ethics have helped to drive innovation in the region. The 2021 Bloomberg Innovation Index ranks South Korea at 1, Singapore at 2, Japan at 12, and China at 16.
Regional partnerships - Against the ongoing tide of protectionism, greater regional integration will be important to sustain the region’s growth momentum. Intra-regional trade within Asia and ASEAN is expected to rise as the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement (FTA) between the 10 ASEAN economies and its FTA partners, incentivises the rebuilding of supply chains in the region.
On the sustainability front, ESG corporate disclosures have improved in Asia. Research shows that Asian companies that are highly aligned to the EU ESG Taxonomy have been able to trade at a premium (~55% on P/E and 64% on EV/EBITDA terms) relative to their sector peer groups5.
Asia’s diversity helps to increase the diversification benefits to international investors. With the peak in global trade (as a % of global GDP) in 2008, the correlation of Asian markets to the US and European equity markets have trended lower, strengthening the case for an Asian allocation to global portfolios. Current valuations for the MSCI AC Asia ex Japan have corresponded to compelling market returns over the next 1-, 3- and 5-year periods.
We believe that Asia is on the cusp of a new growth era which potentially warrants a larger share in asset allocations and a more thoughtful consideration of other markets beyond the incumbents. In “New Asia”, the gap between winners and losers is likely to widen. Investors who have a good understanding of local nuances and can navigate each market’s unique landscape will be better positioned to add alpha.
This is a summary of the article “The case for Asia”. Please click here to read the full article or download the pdf for the entire report.
Look out for our 2023 Asian Expert Series on “New Asia” where we delve deeper into some of the growth drivers highlighted in this article.
Sources:
1 Brookings. Defined as anyone earnings more than USD11/day in 2011 PPP terms.
2 Globaldata.com
3 IMF, World Economic Outlook Update, July 2022.
4 Nikkei Asia. COVID's striking impact on Southeast Asia's digital economy. November 2021.
5 A new era for ESG in Asia Pacific. Goldman Sachs Equity Research. February 2022.
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