Wealth Management: Instant Insights – The Asian Century
William Haggard, Erdinç Benli, Victor Balfour, Wealth Management
Idea in brief: The Asian Century
A demographic titan
With 4.6 billion inhabitants, Asia accounts for nearly two-thirds of the global population.
A majority of the world’s largest cities are in Asia2. By 2030, Asia will be home to more than half the world’s middle class3 and China is leading the global economic recovery from the pandemic.
Within the Asian continent, Emerging Asia accounts for less than a quarter of the global economy today and its investable equity markets (MSCI) still account for less than a tenth of global equity markets3.
2World Population Review, 2020
3Market Cap, MSCI, Bloomberg data
Long-term growth prospects
Within the world's largest and most dynamic continent, Emerging Asia includes many of Asia's fastest-growing and largest economies. These are China, India, Indonesia, Malaysia, the Philippines, Thailand and Vietnam4.
Today this region accounts for a quarter of the global economy, and a far smaller proportion of total investable equity markets (Figure 1).
Yet with most of the world's population living in the Asian region and its economies both diversified and sophisticated, the global economy and its capital markets will continue to gravitate towards Asia over this century.
4Emerging Asia IMF definition
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Unlike other emerging markets, Emerging Asia's economies have developed broad consumer and capital goods sectors. This means they are less reliant on commodity exports and less exposed to commodity price fluctuations vis-à-vis other emerging markets. From China's developed eCommerce market to a world-class Indian software sector and Taiwan's diversified manufacturing base, Emerging Asia's economies are pluralistic by nature.
Ongoing reforms have improved efficiency
Heavyweight economies such as India and China have made progress in liberalising their economies and capital markets in recent years. For example, mutual market access schemes such as China’s Stock Connect (2014) and Bond Connect (2017) initiatives have opened up Chinese capital markets to foreign investors and added over 1,400 companies to China’s investable universe. More recently in 2019, China doubled the size of its Shanghai Free-Trade Zone in a drive to open markets, and in 2020 China signed together with 14 nations the Regional Comprehensive Economic Partnership (RCEP), a trade deal covering roughly 30% of the world’s population and global output (see Figure 2). Such initiatives are increasing transparency and broadening access to Emerging Asia’s capital markets.
Corporate governance across the region has also steadily improved in recent years with the emergence of shareholder activism helping to drive this change. In Southeast Asia, tangible improvements to reporting and enforcement of corporate governance standards have helped address recent concerns over corporate corruption. Meanwhile, politics in the region remains relatively stable compared with other emerging regions, facilitating foreign investor access to Emerging Asia's capital markets5.
5Global Investment Strategist, Kevin Gardiner, Rothschild & Co
Emerging Asia: Short-term risks but long-term and historic strategic opportunities
The region has been a significant beneficiary of a more global and liberalised trade policy since the 1980s. Since then, Emerging Asia has enjoyed an average annual GDP growth rate of +7.3%6.
Protectionism between the US and China remains a short-term economic risk. A Democrat Presidency is unlikely to see a full return to pre-2016 relations between the two countries. Markets nevertheless have learnt to live with trade tensions which are likely priced into local stock markets. The longer term strategic reasons for investing in the region remain intact. Emerging Asia remains on track to deliver more than three times the growth rate of developed economies in the coming years8. The region is now set to regain its status as the world’s primary economic zone, a return to the economic status quo up until the mid-19th century.
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In the last few years, lower interest rates have eased pressure on Asia’s borrowers whilst its conservative exposure to foreign-held debt has improved sovereign credit ratings. To add to this investor-friendly backdrop, the region’s income gap with the West continues to narrow and personal income and spending is growing. Most importantly for investors, it is also why equity market returns for Emerging Asia could potentially outperform global equity returns over the next 10 years as the region will remain the most dynamic part of the global economy as the world’s GDP and capital pivots there (Figure 3).
How to invest in Emerging Asia
There are a number of ways to invest in Emerging Asia to participate in the region's ongoing performance and long-term potential. Valuations of investments in local businesses are often lower than those in Western companies, but the breadth, complexity and depth of local markets call for expert advice when investing.
With our Investment & Portfolio Advisory team at Rothschild & Co Wealth Management, we can advise on the most appropriate ways of gaining exposure to Emerging Asia. We look forward to hearing from you.
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