Cover story – 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 & Part- ners, puts the case for another country that could help drive the region’s GDP. “Taiwan is a small island with a small popula- tion 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 high- ly 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 per- haps 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 neg- ative outcomes, it is India that is expected to be a beneficiary, as
18 | portfolio institutional | September 2023 | Issue 126
China remains an important factor for future Asian growth, despite the expected decelerating of its headline
GDP growth. Vivian Lin Thurston, William Blair
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 mani- fested 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 Mar- kets 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 posi- tioned 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?
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