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Eastspring: Gap between winners and losers to widen in 'New Asia'

Bill Maldonado
Bill Maldonado1/17/2023 02:21 PM GMT+08  • 3 min read
Eastspring: Gap between winners and losers to widen in 'New Asia'
A vendor at a night market in Vietnam. The country’s share of exports to the US has increased / Photo: Bloomberg
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As new drivers emerge, Asia will continue to be the fastest-growing region in the world, providing more significant investment opportunities and diversification for investors. In “New Asia”, as the gap between winners and losers widens, active management and local knowledge will be even more critical.

Asia accounts for half of the world’s population and almost half its GDP. It made up 50% of the global consumer class in 2020 and 55% of global Internet users in 2021. The region is forecast to grow by 5% in 2023, making it the fastest-growing region globally.

As Asia consists of 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 pandemic. Digital adoption is accelerating, spurred by the region’s high smartphone 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 ethic, have helped to drive innovation in the region. The 2021 Bloomberg Innovation Index ranks South Korea at one, Singapore at two, Japan at 12, and China at 16.

See also: Holding cash will be a winning strategy in 2023, investors say

Regional partnerships: Against the ongoing tide of protectionism, greater regional integration will be essential 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 highly aligned to the EU ESG Taxonomy have been able to trade at a premium ( about 55% on P/E and 64% on EV/ebitda terms) relative to their sector peer groups.

Asia’s diversity helps to increase the diversification benefits to international investors. With the peak in global trade (as a percentage of global GDP) in 2008, the correlation of Asian markets to the US and European equity markets has trended lower, strengthening the case for an Asian allocation to global portfolios.

See also: AI and ESG: How do they fit?

Current valuations for the MSCI AC Asia ex Japan have corresponded to compelling market returns over the next one-, three- and fiveyear 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 will likely widen. Investors who understand local nuances well and can navigate each market’s unique landscape will be better positioned to add alpha.

Bill Maldonado is the chief investment officer at Eastspring Investments

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