Asia and EMs offer compelling value

EMERGING markets (EMs) and Asia offer compelling opportunities for investors willing to navigate the volatility and uncertainties of global economic trends.

As the world anticipates policy shifts under the new US administration, the potential effects on these markets are unclear. While aggressive domestic stimulus and trade protectionism in the United States could lead to inflation, delay the US Federal Reserve’s rate cuts, and bolster US dollar strength, many of these policies may not unfold as expected.

What is clear, however, is that disciplined investors have the chance to uncover opportunities amid the volatility.

Eastspring Investments highlights that “long-term economic growth drivers in these markets remain intact”. The international fund management company asserts that EMs are poised for growth, with increased capital expenditure, infrastructure investment, decarbonisation, and supply chain diversification driving higher earnings.

Further, EMs are also expected to grow faster than the developed markets (DMs).

“EMs typically outperform DMs when their growth gap widens,” Eastspring Investments notes, suggesting this is a trend that investors should consider.

Among EMs, ongoing corporate reforms and improved capital allocation in Asia, in particular, are strengthening balance sheets at both the corporate and government levels, it adds.

Zooming into Asean, it notes the outlook for 2025 remains broadly positive. The region’s rise is underpinned by its growing middle class, improved banking penetration and a continuing migration of global supply chains.

One standout statistic is Asean’s share of global foreign direct investment (FDI), which has surged from 5.7% in 2015 to a remarkable 21.3% in 2023. This influx of FDI boosts capital accumulation, technological progress, and skill development.

“Positive demographics, with a low median age of 30 and a burgeoning middle class, promise significant consumption power,” says Eastspring Investments.

Countries like the Philippines and Indonesia exemplify this trend, where a growing workforce is propelling digital banking and other innovations.

These dynamics suggest Asean is well-positioned for sustained growth beyond 2025, Eastspring Investments points out.

Meanwhile, in the broader Asia-Pacific region (excluding Japan), medium-term challenges remain a concern, despite the promising themes of long-term growth. These challenges stem primarily from higher US tariffs.

“Stocks in the region could be adversely affected by higher US tariffs, as 10% of their revenue comes from the US market,” Eastspring Investments states.

Within Asia, sectors such as technology, automotive, healthcare and chemicals are most exposed to the US market, it notes, while utilities, telecommunications and financials have the least US exposure, making them more resilient.

According to Eastspring Investments, Asean markets demonstrate a defensive edge over North Asia, given their lower revenue exposure to the United States and fewer direct US competitors.

Furthermore, 11% of Asia-Pacific firms – by index weight – maintain significant US-based operations that could benefit from potential US tax cuts.

Under the new US administration, policies promoting fossil fuel extraction could reduce energy costs, easing inflation pressures across Asia, where fuel prices significantly influence the consumer price index.

On the flip side, Asia’s burgeoning green energy industries, including China’s electric vehicles and Indonesia’s battery supply chains, may face headwinds.

Still, as Eastspring Investments notes, “earnings will be the primary driver of share prices”, and valuation remains the most critical factor in equity investments.

In terms of valuation, Asia and EMs present a compelling case.

“Asia and EMs are attractive in absolute terms and extremely attractive relative to the expensive markets of the West,” it states.

Moreover, global investors remain significantly underweight in these regions, creating substantial upside potential, it adds.

“In such an environment, a disciplined stock-picking approach is key to generating alpha.,” Eastspring Investments notes.

“For now, we are finding interesting opportunities in Hong Kong, Indonesia, and Thailand, particularly within the communication services, financials, and consumer discretionary sectors,” it adds.

Glimmers of hope

Turning to Latin America (Latam) and Central and Eastern Europe, the Middle East, and Africa, the outlook of these EM markets offers a mix of challenges and opportunities.

Latam endured a tough 2024, with Brazil and Mexico grappling with high interest rates and controversial judicial reforms, respectively.

However, there is potential for a turnaround.

“Brazil offers attractive valuations, prospects for higher commodity prices, and the potential for interest-rate cuts,” Eastspring Investments observes.

A more market-friendly presidential candidate in Brazil’s 2026 elections could also ignite optimism.

Meanwhile, Mexico stands to benefit from increased FDI as global supply chains diversify and near-shoring becomes more prominent.

Emerging Europe, though weighed down by negative sentiment from Developed Europe, is another area to watch. The sell-off in Eastern European markets has created opportunities for discerning investors.

Many companies in this region are well-diversified, attractively valued, and less dependent on slowing demand from Western Europe. Their robust balance sheets provide a solid foundation for recovery.

Disciplined approach

In general, the current environment underscores the importance of staying focused on valuations and fundamentals, as the intrinsic strengths of EMs and Asian markets offer compelling reasons to invest.

A disciplined stock-picking approach is is essential to identify opportunities that align with long-term growth potential while mitigating risks.

Ultimately, the appeal of Asia and EMs lies in their resilience, growth potential and relative value compared to DMs.

With careful strategy and a clear eye on valuations, investors can capitalise on the rich opportunities these regions offer.