Outlook & commentary
A region on the rise: key conclusions from our Asia Conference
Our clients and investment professionals recently met in Berlin for our 10th annual Asia Conference. Here are some of the highlights from two days of discussions about the world’s most dynamic region.
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The US dollar has long been the currency of choice for banking and trade, and for valuing all other currencies. This has brought the US enormous economic benefits and significant structural downsides. Yet a shift away from the dollar may have begun, which could help the global economy in the long run.
ESG investing is on the rise
While Asia once lagged Europe in many environmental, social and governance (ESG) issues, an increasing number of governments and corporations in Asia are paying close attention to ESG factors. We expect this shift will gain momentum as the region’s markets continue to develop.
Politicians are driving significant reforms
Politicians know that the best way to get and stay popular is through sustained economic growth. Many Asian governments are focused on adapting their economic business models. They recognise that supplying goods to tapped-out US and European consumers will not work for much longer.
China is leading the region’s reform efforts, aiming to rebalance its economy away from exports and manufacturing towards consumption and services. Indeed, China’s spending on consumer needs and essentials is already falling, leaving more room for discretionary spending.
In India, Prime Minister Narendra Modi is moving his country forward along similar lines, restructuring the country’s banks and inefficient monetary system through an aggressive “demonetisation” plan. A better biometric-based identification system called Aadhaar should make government services, such as welfare, more targeted and less susceptible to fraud.
With general elections due in 2019, India does, however, face significant electoral unknowns. But greater political uncertainty exists in the European Union, which is grappling with Brexit and with Italy’s threats to flout the EU’s rules – or even withdraw from the monetary union.
Trade troubles won’t derail Asia’s high-tech shift
In recent months, trade friction between Asia and the United States created a steady flow of worrisome headlines for good reason. Trade wars help no one, particularly big exporters such as Japan, China and South Korea. Although US President Donald Trump seems to have softened his initially hard-line stance towards China, it is unclear whether new tariffs are officially off the table – particularly with regard to technology. Asia’s regionally efficient supply chains mean the negative effects of tariffs can quickly spread; consider how the technology sectors in the US and China are inextricably linked with South Korea, Taiwan and other countries.
Yet Asia’s tech sector is on a good trajectory. At some point in the next few years, Asia appears set to become the largest investor in research and development (R&D) globally, intensifying a high-tech race with the US. Moreover, denying Asia’s economies access to US technology could simply fuel the need for local Asian tech.
Green tech and infrastructure are spurring development
As Asian economies grow, they will come under the same pressure as their US and European counterparts to make that growth sustainable from an environmental perspective. The good news is that many leading economies – in Asia and elsewhere – may now be able to grow even as they decrease the negative environmental impact of that growth. China is leading the way with a strong emphasis on developing green technologies such as solar power and electric vehicles, as well as sustainable food sources through better R&D and agricultural practices.
Infrastructure is also a major development theme for the region. India, Vietnam and Indonesia are addressing their huge infrastructure deficits in the hopes of sustaining strong, open and competitive economies. Asia as a whole is also supported by China’s huge “One Belt, One Road” plan, which is primarily an infrastructure project but could have a halo effect on employment and services development – particularly in Sri Lanka, Vietnam, Pakistan and Bangladesh.
China is opening up its equity markets
China has been taking measured steps to open up its currency, bond and equity markets to international investors even as it carefully controls the flight of capital out of the country. Yet despite an abundance of caution, China’s market reforms are working well – and being expanded. This is turning Chinese equities from an asset class that many investors ignored into one that is being taken seriously, particularly with China A-shares set to be included in the MSCI Emerging Market index this summer.
(For more insights into China, read “Will the “Year of the Pig” be a prosperous one for China?” and “10 key facts about China A-shares”.)
Growth and income are top investment themes
Asia’s compelling structural growth story provides investors with a host of access points:
For fixed-income investors, Asia also offers the ability to boost return potential and diversification – particularly for portfolios overexposed to US high yield or overly sensitive to Federal Reserve policy. Thanks to its growing markets and rising domestic investment by local investors, Asia should be whipsawed less by US investors in years to come. Instead, the region will be powered by sound economic policy, strong fundamentals and exciting investment opportunities from both equities and bonds.