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The rise of Asia – the future engine for global growth?

We take a closer look at why Asia coped better than the rest of the world in 2020, and share our outlook on whether it could become the engine of global growth.

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.

2020 was a year like no other, for all of us, and for lots of reasons.

By China’s standards, its economy has had one of its poorest years. It grew at its weakest pace in over 40 years.

While the economic damage caused by coronavirus isn’t unique to China, what’s different is that the world’s second-largest economy has suffered less than most. The UK, Europe, the US and even Latin America have struggled to contain the virus, putting strain on any recovery. But China’s economy grew by 2.3% over the year, making it the only major economy to expand in 2020.

It’s not only China that’s experienced lower virus cases relative to the west. Other parts of Asia, like Taiwan, Singapore, Hong Kong and South Korea, have also had a relatively low impact.

So why the difference?

Firstly, Asia already has experience dealing with viral outbreaks, most recently with SARS in 2003. Not only has this taught valuable lessons in handling such a crisis, it’s also shaped social behaviours.

Mask wearing and social distancing is completely new for lots of us here in the UK, but Asian countries are used to it.

Mobile tracking devices have also been used more widely, and a more open approach to data privacy has helped to contain outbreaks and manage the impact on the economy.

Another factor helping Asia’s recovery is the high level of respect for government. Countries like China might lack a tradition of democracy, but there’s a higher level of compliance to rules and guidance.

Is less global trade a good thing?

There are other reasons why Asia could be on a better footing for recovery than just good handling of the virus. Populist agendas have been on the rise in parts of the west, and this could see the trend of globalisation (trade between countries) reverse. This trend was once seen as an important factor for growth.

Global trade has become a declining part of the economic mix in Asia. Lots of trade now takes place within the region, 60% in fact. This means the rest of the world could be less important to the success of Asia’s economy going forward.

While there’s still talk of a US-China trade war, US exports to China make up less than 1% of the total value of China’s economic output. Instead, Taiwan, Malaysia and Vietnam are some of China’s major trading partners. Increased trade connections between China and the rest of Asia could even rise as we exit the pandemic.

Asia's innovation gathering pace

Asia’s becoming less reliant on the rest of the world in other areas too. China, in particular, has been building its own innovation cluster, and is already home to some of the world’s largest tech and ecommerce platforms.

The switch to online and increased dependence on technology has stepped up a gear across Asia in recent years, and more visibly in 2020. Social distancing and stay-at-home initiatives have driven companies to build their online presence, with increasing demand for online entertainment, gaming, grocery deliveries and other retail shopping. This pattern of behaviour is likely to continue as these services help people have more time to focus on other things.

Data collection will support this online growth trend. This puts countries like China in a unique position to be a driver of the next wave of innovation. And it’s not just about the volume of data, the access and customers’ willingness to share their data is key.

Attitudes towards data privacy are different in Asia. Partly as the younger generation has grown up in an environment where data sharing is the norm, but also because consumers actively want better services. Next-generation technology includes areas like 5G and artificial intelligence – there’s a good base for the region to become a leader in these areas.

Room for improvement

The opportunity in Asia is immense, but there’s still work to be done.

For instance, global ESG (Environmental, Social and Governance) issues are becoming more important. The onus for creating a sustainable world is not only on us as individuals, but on companies too.

These issues are more complex in Asian and emerging markets for a variety of reasons. As an example, lots of Asian companies are either family-owned, or have government representation on the board. There are pros and cons to both, but sometimes this creates conflicts of interest or misaligns management decisions with what shareholders want.

That said, the pace of increased focus on sustainability is moving quickly. Lots of companies already adopt good ESG practices, they just aren’t great at formally disclosing what they do.

The engine of global growth

It might be cliché, but Asia looks set to become the engine of global growth over the coming decades. There’s a huge amount of determination from Asian populations to be successful and overtake the western world. With ecommerce in China, software solutions in India, and semiconductors and electronics in Taiwan and South Korea, Asia is well-positioned to maintain its thriving tech sector

Demographics are important too. The region’s population is younger than the ageing west, and this will make a huge difference to consumer habits, innovation, and the way our economies are structured.

Lots of Asia is still developing though, or at the very least is less advanced than more developed nations, and this brings its own challenges. Full economic and political stability is yet to be reached in lots of countries – meaning things can change quickly. While companies could still thrive in this environment, it does increase the risks.

Most recently, Beijing proposed sweeping new antitrust rules for China’s technology industry – this made markets bounce up and down. While the region has lots of long-term growth potential, the risks are greater. This should be taken into account when thinking about investing in Asia. Volatility will be part and parcel of investing here.

This article isn’t personal advice, so if you’re not sure if an investment is right for you, please ask for advice. All investments fall as well as rise in value, so you could get back less than you invest.

Investment ideas

A simple and low-cost way to invest in Asia is through an index fund. These funds aim to track a particular stock market, or index. Providing lots of diversification across a range of countries, sectors, and companies.

iShares Pacific ex Japan Equity Index invests into developed Asia Pacific countries like Hong Kong, Singapore, and Australia, as well as less mature economies like Taiwan and Malaysia. The fund holds over 600 companies.

This index fund doesn’t invest directly in China, but there are ways to invest into the world’s second largest economy. FSSA Greater China Growth is an active fund, run by a fund manager who selects what they believe to be the best companies for growth across China. It invests in companies based, or that carry out most of their business, in China, Hong Kong or Taiwan. It also invests in smaller companies which are higher risk than their larger counterparts.

The same team behind this fund also run FSSA Asia Focus, which invests more broadly across Asia, including China, India, Taiwan and South Korea.

More on iShares Pacific ex Japan Equity Index, including charges

iShares Pacific ex Japan Equity Index Key Investor Information


More on FSSA Greater China Growth, including charges

FSSA Greater China Growth Key Investor Information


More on FSSA Asia Focus, including charges

FSSA Asia Focus Key Investor Information


Learn more about funds


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Explore our Investment Times winter 2020/21 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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