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The rise of Asia

We look at whether Asia can become the engine for global growth, what the investment opportunities are and how to invest.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

All information is correct as at 31 December 2021 unless otherwise stated.

The pandemic has reshaped the world over the past two years. While not everything has changed, lots of trends have accelerated and will continue to define the global economic landscape.

Some of these trends are more obvious, like digitisation and how we use technology. But the way and what we consume is also changing, and so is the way we travel, socialise and work.

It’s easier to spot some of these changes closer to home. But look further afield and the pace or level of development can look quite different.

The engine of global growth?

Asian markets have developed rapidly in recent decades. And given the potential for further change, and for Asia to dominate more of the global economy, the region is often deemed the future engine of global growth.

We’ve already seen Asian markets start to exert their dominance over the past decade. China, for example, made up 15% of the broader emerging stock market back in 2008, but has since reached just over one third. The wider Far East, including China, and Indian Subcontinent regions now account for around 80%. This means other emerging areas have been squeezed out and make up a much smaller part of the index. This includes the likes of Latin America, including Brazil, as well as the Middle East, Africa, and Russia.

At the same time, there’s been a shift in the major sectors that make up the market. Internet, IT, and e-commerce companies represent around 40%, replacing energy and materials as some of the largest sectors.

Source: MSCI, Datastream, UBS, October 2021.

A catalyst for this change has been the gradual opening of China’s stock markets to foreign investors. It also means investors have steadily gained more exposure to domestically focused and internet-led companies, and away from exporters and manufacturing.

We should expect more change to come. Asia has a burgeoning and increasingly affluent middle class and, with money to spend, this creates opportunities for both companies and investors. This includes an increasing take up of everyday consumer staples, as well as healthcare products and financial services. The innovation and growth drivers behind technology, including e-commerce, cloud applications and artificial intelligence, could also become more compelling.

Covid-19 accelerated trends that existed before the outbreak and could continue to aid Asia’s growth. Lots of companies that could benefit from Asia’s digital future strengthened. Take the semiconductor industry, where demand is strong, but supply is tight. The sector has already evolved over time. It previously had several competitors fighting for profits. There are now a few key companies that have reaped the rewards of taking market share.

While slightly behind the curve, the green revolution is also gathering pace across Asia. As governments gradually focus more on reducing carbon, this is driving growth in renewable energy and clean technologies. There are already leading electric vehicle battery makers in Korea, while the majority of the world’s solar energy industry is currently in China.

China’s ‘common prosperity’ agenda could also bring more change. It aims to reduce inequality and narrow the gap between the rich and poor. Several policy initiatives have already been implemented, but there will likely be far more to come.

Don’t overlook some disruption in the short term though – we saw this last year when the authorities put the brakes on private education companies. In this case it could help bridge the gap between those families able and unable to afford extra tuition. But it also means education companies are no longer allowed to make profits.

Over the longer term, improved wealth distribution could put more purchasing power in the hands of the poor, benefiting a range of companies. This could also have a knock-on effect across other Asian countries – China could become a bigger market for others to sell into.

Industries like tourism and healthcare in other parts of Asia could also benefit from increased Chinese consumer spending. In fact, the Chinese middle and upper income groups are forecast to expand by over a third of a billion people by 2030. That’s about as many people that currently live in the US.

While the size of China’s market means it offers lots of opportunity, it faces challenges too and won’t necessarily be the best-performing market from year to year.

In 2020, its market was one of the world’s strongest, partly due to its swift response to the coronavirus crisis. But 2021 was a different story. That was partly because large tech companies with high growth expectations fell out of favour, while other sectors, like property, were hurt by regulatory crackdowns from China’s authorities.

A land of opportunity

China has tended to get the lion’s share of investors’ attention because of its sheer scale. This could increase over time, especially as more Chinese companies will eventually be added to emerging and global stock market indices. This Asian region is large and diverse, and opportunities could abound.

India, another huge Asian market, as well as Vietnam, a smaller but quickly developing country, also both look interesting for investors. India and Vietnam are currently attracting the bulk of foreign direct investment (FDI) and have also seen businesses relocate and diversify their production and manufacturing bases from China.

India is also building strong digital infrastructure, with an increasing proportion of the population with access to wireless data and banking facilities. 2021 was also a strong year for Indian IPOs – up-and-coming businesses that are newly listed on the stock market. There could be more to come this year.

Some of the best companies in Asia are based in countries where the political and legal systems are more fully developed. These include Australia, Taiwan, and South Korea.

However, the less developed nature of other markets like India and China presents greater risks for investors. Investing in Asian and emerging markets can be volatile compared with developed ones. That’s why a long-term outlook of at least five to ten years is essential when investing in these markets.

It won’t always be a smooth ride and there could be tough times ahead for some of these markets. The virus still creates uncertainty across the globe, while the zero-Covid policy used by some Asia Pacific countries could be difficult to maintain, especially with the latest, and more transmissible, Omicron variant. The virus could also be worse for nations that still have largely unvaccinated populations.

The continuation of the virus could favour some businesses, like those in the digital space, over those that rely on social contact. On the flipside, areas related to travel, hospitality and leisure could benefit from any recovery.

Investors taking a stronger interest in environmental, social and governance (ESG) issues might also need to consider how they invest in these markets. Some countries remain far behind the west in terms of the pursuit of net zero, corporate governance and human rights.

It’s therefore important to focus on individual companies – both in terms of the fundamental factors that could drive their success, as well as their approach to ESG issues – and not only the wider outlook for the economy. That’s where investing with an active fund manager comes in.

Many fund managers assess the prospects of each company, regardless of where they’re based, and consider broader governance issues. It’s a good idea to consider the individual objectives of any fund, as well as its investment approach, before making an investment.

How to invest

There are several Asian funds on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential. Here we highlight a mix of funds focused on different areas and using different approaches, though you can find lots more ideas on the funds section of our website.

Investing in funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

This article isn’t personal advice. All funds and any income they produce can fall as well as rise in value, so you could get back less than you invest. If you’re not sure if an investment is right for you, ask for financial advice.

ASI Asia Pacific Equity

This fund offers a broad way to invest in the Asia Pacific region and could help diversify a growth portfolio with a long-term view. It invests in a wide range of Asian markets, including both established economies, like Hong Kong and Australia, and less-developed ones like China and India. The fund has a focus on businesses that rely on growing consumer wealth. But it aims to have at least some exposure to most major sectors to provide a good level of diversification.

Find out more about ASI Asia Pacific Equity, including charges

ASI Asia Pacific Equity Key Investor Information

FSSA Greater China Growth

The fund focuses on the Greater China region, which covers China, Hong Kong, and Taiwan. It could form part of a broader global investment portfolio, or diversify the Asian and emerging markets portion. A fund focused on a single emerging country is a high-risk option, so we think it should only make up a small portion of an investment portfolio. Stewardship forms part of the fund management team’s philosophy. That means they focus on ESG issues and engage with companies to make sure they meet good governance standards.

Find out more about FSSA Greater China Growth, including charges

FSSA Greater China Growth Key Investor Information

Jupiter India

This fund focuses on the Indian stock market. It invests in companies of all sizes, but invests more in small and medium-sized companies than some other India funds. This could boost growth, though smaller companies are riskier. We think India has long-term growth potential. Though a fund focused on a single emerging country is a high-risk option, so it should only make up a small portion of an investment portfolio. This fund could sit alongside those that invest across the globe or more broadly across Asia.

Find out more about Jupiter India, including charges

Jupiter India Key Investor Information

iShares Pacific ex Japan Index

A broad spread of companies based across the Asia Pacific region are held in this fund. This includes developed Asia Pacific countries like Hong Kong, Singapore, and Australia, as well as less mature economies like Taiwan and Malaysia. However, it doesn’t invest in some emerging markets like India and China. It aims to track the performance of its benchmark, rather than outperform it like active funds do. It currently invests in around 650 companies, across sectors including technology, financials, and consumer areas. We think it's a convenient, low-cost way to invest in Asian markets.

Find out more about iShares Pacific ex Japan Index, including charges

iShares Pacific ex Japan Index Key Investor Information


Explore our Investment Times January 2022 edition for more articles like this.

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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