“The West is the best, the West is the best,” sang Jim Morrison on The Doors’ 1967 track, The End. Few people at the time would have argued with him. Booming economies, lavish lists of investments and rising living standards all pointed to the West leaving the rest of the world behind. But that was a long time ago. Today, the modern equivalent can be found in the opposite side of the world. It is now time to look East.
The rise and rise of Asia has been powered by Taiwan, Singapore, South Korea and, of course, strongly carried forward by the growth of the population giants: China and India.
From here, the growth of Asia, it is said, will be led primarily by India. A point supported by the International Monetary Fund (IMF), which has seen enough to raise its 2023 growth forecast for the country to 6.1%. This boosts expectations that India will be the world’s fastest growing economy this year. The IMF says its upswing revision was guided by strong growth in last year’s fourth quarter. This will only get better as the IMF sees India’s economy expanding by 6.3% in 2024.
This is at a time when the West celebrates any form of growth, no matter how miniscule. Fitch’s credit downgrade of the US in August has added to concerns about the Western economy.
Gustavo Medeiros, Ashmore’s head of research, believes that India is very much in vogue due to a combination of positive demographics, structural reforms and a favourable geopolitical position, which supports investment in the country. Added to that, India has an enviable scale. All of this amounts to it being one big engine of growth.
This is a point shared by Vivian Lin Thurston, partner and portfolio manager at William Blair. She says growth in India is being driven by a confluence of strong structural factors including, to some extent, a low base in terms of total GDP and per capita GDP, meaning “there is a lot of headroom for business for growth”.
Land of plenty
This is backed up by the favourable demographics argument, with a fast growing and young population and a vibrant private sector as well as an entrepreneurial and increasingly well-capitalised market economy. It also enjoys what appears to be a friendly and stable relationship with the US and the West.
“It is fair to say that the quality of India’s GDP growth has been improving, with a higher share of investment going into manufacturing, which typically has a greater impact on the rest of the economy,” Medeiros says.
James Donald, head of emerging markets at Lazard Asset Management, says India overtaking China to become the world’s most populous country presents a compelling case for more investment opportunity over the next decade.
With its demographic dividend and nearly 80% of its population under the age of 50, India is projected to produce decades of growth until the 2060s.
India has all the positives going for it now, says Rob Brewis, manager of the Aubrey Global Emerging Markets strategy. These include positive government policies and accelerating urbanisation. “India has some decent, high return growth companies to invest in,” he adds. Moreover, it will be the world’s third largest economy in the next few years.
And for Alan Lander, investment manager at Walter Scott & Partners, which is part of BNY Mellon Investment Management, India’s journey “has been one of the great economic tectonic shifts of recent decades”. Yet, he says, “an air of ‘promise unfulfilled’ has often clung to the Indian economy”.
Don’t forget China
That perception, he notes, may well be about to change. “On track to surpass China later this year as the world’s most populous nation, there is a growing sense that India stands on the cusp of an exciting new stage in its development,” Lander says. But one should not disregard China. It will still remain a big part in the story of the continuing rise of the East, despite not maintaining its pre-eminent position.
“China remains an important factor for future Asian growth, despite the expected decelerating of its headline GDP growth, with just 4% to 5% real growth expected in the next few years,” Vivian Lin Thurston says.
In addition, she adds that China is also a major source of growth for some Asian countries within the wider rise of the East. This is especially true in the Association of Southeast Asian Nation countries, due primarily to high Chinese demand for commodities, the shift to relocate global supply chains and high levels of Chinese tourism.
Young blood
Also within the growth of the East is the shift in the measure of Asian GDP within global trade. The region claims around 60% of the world’s population and around 45% of global GDP. The latter figure is expected to grow, with the prediction that this decade, and beyond, is likely to see a continued outperformance by Asia.
Medeiros has worked out the numbers to match these claims. He notes that the Indian economy was worth $3.2trn (£2.5trn) in 2021, which was only a fraction of the $17.7trn (£13.9trn) Chinese economy. If India’s economy expands by 7% per year and China grows by 3.5% annually, India’s GDP would stand at $6.3trn (£4.9trn) by 2031, compared with $24.9trn (£19.6trn) in China. In other words, in this scenario, India will add $3.1trn (£2.4trn) to global GDP by 2031 with China contributing $7.3trn (£5.7trn). Medeiros points to Indonesia, the Philippines and Vietnam among the countries that have the potential to add significant value here.
A point supported by Brewis, who says the most interesting countries of Southeast Asia are those with large and young populations. “Indonesia is perhaps the most interesting given the size of the population and the recent favourable direction of government policy,” he says.
Tom Miedema, investment manager at Walter Scott & Partners, puts the case for another country that could help drive the region’s GDP. “Taiwan is a small island with a small population and little in the way of natural resources,” he says. “Yet it’s a success story driven by the people and entrepreneurs that have led it forward over the last couple of decades.”
There are, for Medeiros, several elements suggesting Asia will remain such a strong growth locomotive. These include a highly educated population, solid work ethics, a strong demographic profile – albeit there is a lot of divergence with China and Korea ageing while India and Indonesia keep expanding. Then there is a solid macro-economic framework – as inflation has been much less volatile across Asia – and structural reforms.
But for Lin Thurston, risks remain on the geopolitical front. If de-globalisation becomes more material and regional stability is challenged by tensions around Taiwan, then Asia’s growth may be disrupted.
In addition, the macro, policy and political cycle domestically within these Asian countries “may also impact the trajectory of future growth, or, perhaps, that path is not going to be linear and straightforward as we have experienced in the past,” she says. This presents a possible need for a cautious pause when looking the case of the East.
Political tensions
It is when framing the associated geopolitical risks that are perhaps the hardest to predict for the East. These are not, however, necessarily bad for the region. “We suspect that the willingness to reduce supply chain dependence on China will lead to more, not less, intra-Asian trade, as some companies relocate from but still have a significant share of the supply chain based in China,” Medeiros says.
And where China is to face geopolitical tensions through negative outcomes, it is India that is expected to be a beneficiary, as US companies shift their supply chains from China. But the ongoing US-China tensions remain an overhang for Fabiana Fedeli, chief investment officer of equities in multi asset and sustainability at M&G Investments.
This, she says, has manifested itself in a higher risk premium and lower valuations. “The tensions are unlikely to go away completely and their impact has to be considered when selecting stocks,” she adds. But there is an alternative scenario, one where the geopolitical situation can be cited in favour of the rise of the East. “We are at the beginning of an era of regional rather than global spheres of influence, which is proving beneficial for many smaller Asian nations, as well as larger ones such as India,” says Will Scholes, fund manager at the Premier Miton Emerging Markets Sustainable strategy.
At the same time, and in another beneficial way for the East, Scholes observes that the increasing acceptance of the need for investors to support climate transition plans and broad-based electrification, which he sees in terms of the economic export ‘pie’ growing, is likely to be shared out more widely, with “exciting investment opportunities” in Indonesia, Vietnam and Thailand. Even “China cannot be ruled out”, with its dominance of many clean-tech industries. But still, it is India that looks best positioned with a 10-year investment horizon, Scholes says.
And for Paulo Salazar, head of emerging markets equities at Candriam, South Korea is poised to gain advantages from demand related to the US’ Inflation Reduction Act, presenting yet another regional boost.
Electrifying growth
If this is the optimistic outlook, how should investors respond to this obvious opportunity?
Medeiros believes that Asia is the place to invest in structural growth stories. Here, he notes that other regions of the world may bene t from Asia’s massive growth, as Asian countries are mostly net importers of resources. “When coupled with the energy transition, that will present good opportunities across the capital structure in different countries,” he says.
Two large M&A transactions over the summer illustrate this well. Volkswagen purchasing 5% of China’s XPeng and Saudi Arabia buying 10% of Vale’s base metals business highlights that emerging markets hold the most assets and value in the electric vehicle (EV) supply chain, and trade at attractive valuations.
German companies have been rapidly losing market share, in China and abroad, to Chinese EV manufacturers and appear to be under pressure from their shareholders. “The transaction may be the first of many and highlights the challenges of reducing economic exposure away from China,” Medeiros says. Lin Thurston thinks that investors should continue focusing on a bottom-up approach in the region, to identify attractive investment opportunities with a “macro and policy consideration overlay”.
On a more practical level, James Donald says investors should consider gaining exposure to the East, either through a regional Asian strategy, through a more diversi ed global emerging markets strategy, or a global equity fund.
Where’s the gold?
So where are the specific institutional investment opportunities in the East? In the equity space, India and Indonesia are great places to harvest growth, Medeiros says. He also cites Malaysia and Thailand as interesting due to their “idiosyncratic factors”. He also lists Chinese stocks as a “value opportunity”. Whereas Taiwan and South Korea will have a significant part of the artificial intelligence supply chain with a fraction of the levels of valuation from companies in the West.
Lin Thurston sees consumer and technology as the key sectors in Asia where potential long-term investment gains can be found.
Donald also points to Indonesia’s growth prospects, which are also improving and “should not be overlooked” as it is climbing up the metals value chain, from mineral ores to processed metals to EV, as it is home to many of the key metals for such production, namely nickel, copper and bauxite.
He also breaks down the investor attractions by region and sec- tor. In China: financials, consumer staples, healthcare and IT appeal. In Taiwan, it is IT, in South Korea: financials, consumer discretionary, communication services and consumer staples. In India, he lists energy, materials and communication services. Within Indonesia, financials, communication services, industrials and energy standout, while energy and financials are appealing in Thailand.
Tech and growth
Tom Miedema puts the Taiwan tech industry as a hugely appealing investment. “TSMC is at the centre of that,” he says. “being the global leader in semi-conductor technology.”
Paulo Salazar says you cannot ignore China, with the current market scenario including new “secular growth themes” such as digital-cloud roll-out for Chinese enterprises, an advancement of high-end manufacturing and the integration of AI features by software and gaming leaders.
Here the rising demand for AI and ChatGPT-associated processing and memory semi-conductors is set to be a tailwind for selected companies in Taiwan and South Korea, Salazar adds. And from a value chain perspective, he says multiple Asian companies are direct contributors to the AI theme’s growth and are expected to be long-term bene ciaries of the transition.
For Fabiana Fedeli, there is also much for investors to look at within China. “Aside from all the macro-economic noise, we are encouraged by what is happening from a micro-economic or bottom-up perspective: a number of large Chinese companies are doing a good job in terms of margins and profits, despite softer-than-desired headline growth, and we are seeing many companies returning cash to shareholders in the form of buybacks,” she says.
In its range and depth, the future of investment is clearly in the East.
Comments