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Asia: The Game Changer for Investment Diversification

Power of Ideas
Asia: The Game Changer for Investment Diversification

Asia is a game changer for the prescient investor.

Following the end of the pandemic, Asia is set to regain its place as the main engine of growth for the global economy in 2023. This year, we expect the Chinese GDP growth to recover to 5.4 percent, an uplift from last year’s 3.0 percent growth. India’s economy will expand by 5.9 percent in 2023, while combined Association of Southeast Asian Nations states of Indonesia, Malaysia, Philippines, and Thailand will grow by 4.8 percent and the original “Asian tiger” economies of Hong Kong, Singapore, South Korea, and Taiwan by 1.5 percent in total and Japan by around 1.4 percent.

The diverse Asian landscape presents a hinterland for global businesses and investors.

Asia’s resurgence is driven by its:

  1. broader role as a diversifier for global investors and businesses, amidst geopolitical tensions;

  2. potential in the decarbonization race against climate change; and

  3. innovation for global enterprise with its growing pool of young talent.

Why A-S-I-A?

These powerful tailwinds will drive economic growth and returns for investors in the coming years.

A: Asymmetry—Providing Diversification for Investors and Businesses

For the next decade, Asia’s longer-term growth rates will outpace American and European countries, as the region’s lower productivity levels continue to catch up with more advanced economies.

According to the World Bank, US’ average GDP per capita reached a high of USD62,000 in 2021 in real terms, which is comparable to parts of Asia; Singapore’s GDP per capita (USD66,000), Hong Kong’s (USD44,000), Japan’s (USD35,000), and South Korea’s (USD33,000). However, GDP per capita levels were far less for China (USD11,000), Thailand (USD6,000), Indonesia (USD4,000), and India (USD2,000).

Asia’s relatively youthful population across East and South Asia is a supportive demographic for consumption and investment trends, in contrast to nations saddled by the rising burden of an aging populace. China’s share of senior citizens is below 15 percent, while Indonesia’s and India’s elderly make up only about 7 percent of the population.

S: Sustainability—From Carbon Emitter to Carbon Sink

Governments and regulators are more active in developing environmental, social, and corporate governance legislation, as calls to action grow louder at global summits like the 2021 United Nations Climate Change Conference (COP26). Given that Asia contributed to a lion’s share of 39 percent of global emissions in 2019, it has the potential to enact significant change given its critical role in global supply chains.

Asia’s rich tapestry of terrestrial, mangrove forests, peatlands, and agricultural soils provide fertile ground for nature-based carbon sinks. This refers to ecosystems that absorb and store more carbon than they release. Based on a recent McKinsey report, while Asia-Pacific has over 1,300 emitter companies, up to 55 percent of future carbon capture, use, and storage potential will come from the region by 2050. The future progress will depend on next steps taken by governments and companies to coordinate, invest, and innovate in the areas of carbon sequestration.

I: Innovation—Powering the Global Race

China’s electric vehicle (EV) market is the world’s largest as at end-2022, accounting for close to 60 percent of global EV sales. The country also produces over half of global EVs and 60–90 percent of global battery and battery material production. The EV supply chain beneficiaries include upstream beneficiaries like lithium producers in China and Australia and accompanying technologies, including producers of advanced driver-assisted systems.

The industrial robotics and automation industry is another growth driver for Asia. According to Macquarie research, China had 140,500 robots installed in 2020, and this is expected to grow at a compound annual growth rate of 20 percent from 2021 to 2025.

A: Artificial Intelligence—Lost and Found in Translation

Given the relatively closed-loop nature of China’s internet ecosystem and government’s regulation of online content, we believe China’s AI development and beneficiaries from large language modelling would diverge from global peers. Besides refining efficacy of social media advertising, opportunities presented by China’s AI trends include productivity gains in digital content generation and business operations and the rising usage of cloud computing infrastructure.

As a percentage of GDP, China's cloud computing and IT spending continues to lag the US. Therefore, cloud computing penetration in China should accelerate in tandem with AI technology adoption.

Asia’s game-changing role in the global arena is due to a confluence of these geopolitical, social, and economic factors. The diverse Asian landscape presents a hinterland for global businesses and investors who seek diversification from what lies ahead in developed markets.