Asia the rising star of investments

ASIA’S compelling fundamentals, from its trade dominance and consumer growth to its innovation prowess and attractive valuations, make it a standout region for investment.

While challenges exist, the opportunities far outweigh the risks. As Eastspring Investment Services puts it, “The case for long-term investing in Asia is compelling.”

With a strategic and informed approach, investors can tap into Asia’s vast potential and participate in its growth story for years to come.

It is not only the world’s largest trading region, but also a growing supply chain hub.

According to Eastspring, it accounted for 53% of global goods trade in 2021 and is home to 49 of the world’s 80 largest trade routes. Post-pandemic, companies are increasingly adopting the “China+1” strategy to diversify manufacturing bases.

Beneficiaries of this shift include Asean countries and India, as multinationals leverage the region’s strengths. This diversification is expected to underpin growth further and strengthen Asia’s role in global supply chains.

Demographic dividend

The region’s demographic dividend is another cornerstone of its investment appeal.

Asia’s population accounts for about 59% of the global total, and its rapidly growing middle class is becoming an increasingly significant driver of domestic consumption.

Eastspring notes that Asia will contribute one in two of the world’s upper-middle-income and above households by 2030, with varying income levels creating demand for a broad range of goods and services. Basic goods make up 78% of total consumption in the region, while special treat and first luxury items account for 17% and 5%, respectively.

Innovation and technology are reshaping Asia’s landscape.

By 2030, the region’s fintech revenues are projected to surpass those of North America.

“Asia is also becoming a hub for global technology and industrial innovation,” Eastspring states, adding that initial public offering activity is robust, with Asia Pacific leading in proceeds and volume in 2024, with India standing out.

Despite its achievements, Asia remains under-represented in global financial indices.

Eastspring highlights that, as of June 2024, Asia ex-Japan equity markets accounted for just 9.38% of the MSCI AC World Index.

However, attractive entry points at current valuations present opportunities for discerning investors.

The MSCI AC Asia ex-Japan Index, for instance, boasts over 1,000 constituents, with growth sectors such as information technology, communication services, and consumer discretionary playing leading roles. The growth subset of the index has outperformed the broader index cumulatively since 2017.

Asia’s diverse economies offer a unique blend of stability and dynamism. From quality growth companies that provide portfolio stability to emerging growth firms with high appreciation potential, opportunities abound.

Eastspring explains, “We strive to identify emerging/structural growth companies as early as possible in their growth cycle when there is the longest runway for growth.”

Timing plays a crucial role for cyclical growth companies, with success hinging on monitoring industry and company fundamentals closely.

Potential rerating

From DBS Bank’s perspective, Asia’s integration and collaboration continue to deepen, with new trade ties emerging in Europe, the Middle East and Latin America. This trend mitigates US-China trade tensions while boosting the region’s economic resilience.

Asean, in particular, benefits from US Federal Reserve (Fed) easing, supply chain diversification and foreign direct investment (FDI) under the China+1 strategy. Lower labour costs, proximity to China and government incentives further enhance Asean’s appeal.

DBS Bank also underscores the importance of policy support in maintaining growth momentum. Targeted monetary easing and select fiscal measures in China are expected to uplift investor sentiment.

“These measures are expected to uplift investor expectations,” DBS Bank states, pointing to the potential rerating of Asian equities, which have underperformed globally.

Three tailwinds bolster Asia ex-Japan’s longer-term prospects: falling global rates, stabilising corporate profitability and steep valuation discounts.

DBS Bank highlights that lower interest rates channel capital into high-growth markets, making Asia an attractive region for investors seeking growth and yield. “The long-term narrative to stay constructive in the region remains intact,” it asserts.

Investment themes

China, despite ongoing trade tensions and policy challenges, remains a significant player. DBS Bank notes that Chinese firms have enhanced revenue resilience through diversification and global supply chain localisation.

Overseas income for Chinese companies rose from 2% of revenue at the turn of the millennium to 12% in 2023.

DBS Bank advises, “Stay engaged with the markets in Asia ex-Japan and China, as the inherent fundamentals and outlook are compelling.”

Asean’s equity markets offer both caution and opportunity.

While political uncertainties and market dynamics pose challenges, sectors like banking, Singapore real estate investment trusts (S-REITs), and technology provide robust avenues for growth.

“Asean is likely to benefit more from the China+1 strategy as supply chain diversification becomes necessary amid increasing trade tensions,” DBS Bank explains. Indonesia and Singapore banks, in particular, are well-positioned, with resilient earnings and dividend yields.

S-REITs, which borrow on shorter-term debt, stand to gain from lower interest costs and present attractive yields.

Meanwhile, Thailand, forecast to accelerate gross domestic product growth to 3.5% in 2025, is another bright spot, though political developments remain a concern.

India, with its IT outsourcing strength and infrastructure investments, also captures investor interest. Despite short-term challenges like inflation and foreign investor outflows, India’s potential remains strong.

“India’s large industrial firms are likely to benefit from sustained infrastructure investments, while small and mid-caps will benefit from digitalisation,” DBS Bank notes.

Overall, Asia offers unparalleled investment opportunities across a diverse range of sectors and economies. With its trade dominance, innovation and demographic advantages, the region is primed for long-term growth.

As Eastspring and DBS Bank suggest, informed and strategic investments in Asia can yield significant returns, enabling investors to participate in its dynamic growth story. By navigating challenges with foresight and leveraging the region’s strengths, investors can unlock Asia’s full potential.