This article has been written by an expert contributor, Fidelity International
Acceleration to Asia
In the last two decades, Asia has become a powerhouse of global growth. Demographics and digitalisation have fuelled economic and business expansion, and this has played an important feature in the management of the COVID-19 crisis and the region’s resilient economy. Looking ahead to a post-pandemic world, we believe a new economic order will prevail, and Asia’s enduring role in driving global growth will continue.
It is already apparent that new winners will emerge as opportunities arise from dislocation and existing trends accelerate. Countries in Asia with younger populations and growing middle classes will have consumption tailwinds and offer some of the best growth opportunities, first in technology, and later in leisure and travel. Economies will shift from globalisation to regionalisation, and countries with large local regional populations will benefit.
For investors seeking long-term growth and diversification, the case for investing in Asia now is as strong as ever. However, with more volatility expected and an increasing bifurcation at a country, sector and company level of the winners and losers of the next decade, local expertise and a selective approach will be paramount.
Asia is home to 60% of the world’s population (4.5 billion people)1
How demographics and technology are driving growth
With more and more people being lifted out of poverty, income levels across Asia are also increasing. This rise in the middle-class population is expected to drive significant demand for goods and services in the region during the next three decades.2
As a region at the forefront of the technology industry, the digital revolution has brought even greater momentum to Asian economies. In the last 20 years, technology innovation has accounted for nearly a third of Asia’s per capita growth.3
‘Asian companies are exploiting recent advances in artificial intelligence (AI), robotics, cryptography and Big Data that promise to reshape the global economy and fundamentally alter the way we live and work, in the same way that the steam engine and electricity did in centuries past,’ says Tahsin Saadi Sedik, Senior Economist in the International Monetary Fund’s Asia and Pacific Department. ‘In Asia, as elsewhere, the digital revolution is rippling across industries, from retailing and banking to manufacturing and transportation.’
Spending by Asian middle-class is forecasted to top US$35 trillion by 2030
Disruptive forces have accelerated growth
The global lockdown from COVID-19 has accelerated demand for a variety of services and has broadly benefited companies with solid online propositions. Many of those companies reside in
Asia, as do many stocks across the numerous sectors expected to benefit from the adoption of 5G technology.
In China, working from home has boosted the need for cloud services, which are in their infancy and ripe for expansion; mobile phone time surged to over five hours per day and time spent gaming on Tencent titles Honour of Kings and Game for Peace surged to two to three times the prior monthly run rate. With social distancing a feature in many countries for some time to come, this is likely to further accelerate these trends.
We expect this will put Asia at the forefront of the digital revolution and, with a large younger domestic population, at an advantage to lead the recovery and drive global economic growth.
Supply chain resilience
COVID-19 has also accelerated trends already developing across supply chains. In the short term, as trade and economic activity in the region recovers from its nadir earlier in the year, intra-Asian trade – which for most economies in Asia already represents most of their exports and imports – is accelerating. As industries and governments factor in the learnings of the pandemic, proximity will increasingly feature as a factor to overcome the friction of travel and transport in supply chains.
Over the long term, we believe the disruption of supply chains during the COVID-19 pandemic, along with geopolitical tensions, will drive a more regional approach to trade.
We expect to see the rise of regional economic centres where growing demand from large economies such as China or India fuel growth in other developing countries nearby. This shift in supply chains will benefit countries in Asia with large domestic economies, large neighbouring economies and rising middle classes.
An ever-changing economic landscape
At the stock and sector level, we’ve seen the rise of digital innovation in Asia, with Chinese internet
giants Baidu, Alibaba and Tencent snapping at the heels of their FAANG (Facebook, Apple, Alphabet, Netflix, Google) counterparts in the US. But these large-cap players are just a part of the tech enterprise movement in Asia.
There has been a recent surge in new digital businesses that don’t yet feature in broad market indices. Investors looking to capitalise on tech innovation and growth in the region need to look beyond established stocks and indices.
Three of the MSCI AC Asia ex Japan top ten holdings come from the information technology sector (refer to Table 1, below), which speaks to the importance of this industry in the Asia growth story.
Table 1. MSCI AC Asia (ex Japan) Index top 10 companies as at 31 January 2022
Are investors missing out on Asia?
Despite the strong economic and demographic trends in this region, Asian companies are under-represented in global equity indices. In the MSCI AC Asia (ex-Japan) Index, Asian stocks (excluding Japan) make up just 10.3% of the index.4
When you consider that indices like this are used as benchmarks, many investors can expect to be underweight in their allocation to Asian equities.
An active approach is needed
If you’re getting exposure to Asia via a market index dominated by commodity-based and industrial companies, you may be missing out on tomorrow’s growth drivers. Health care, consumer discretionary and services are under-represented in market-cap weighted indices, and much of the index is still laden with state-owned enterprises and ‘old economy’ companies.
Even before the impact of COVID-19, China’s health care industry was expected to be worth US$2.4 trillion by 2030.5 While health care in the US is the second-largest sector by market cap, it ranks only eighth in China, suggesting that the sector is still early in its development and is well poised to deliver strong future growth.
Active managers, who are not beholden to the index, can capture these opportunities because they take a forward-looking approach to allocating capital and aim to invest in companies well positioned to benefit from the long-term structural developments.
Sources: 1. worldometers.info/population/countries-in-asia-by-population 2. The Brookings Institution, The Unprecedented Expansion of the Global Middle Class, 2017. 3. IMF Data, The Digital Revolution in Asia, April 2019. 4. Fidelity International/MSCI All Worlds Index, 29 January 2021. 5. China Daily, https://www.chinadaily.com.cn/life/2017-08/15/content_30638162.htm. 6. TSMC Annual Report 2019.
Access Fidelity’s best ideas in Asia. Portfolio Manager for the Fidelity Asia Fund, Anthony Srom, is backed by a 400-strong team of investment professionals worldwide. He carefully selects 20 to 35 companies from more than 1,500 Asian equities to build a concentrated, high-conviction portfolio of our best ideas in Asia.
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Prior to making an investment decision, retail investors should seek advice from their financial adviser. This document is intended as general information only.