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The strengthening case for investing in Asia
Julie Dickson
Investment Director
KEY TAKEAWAYS
  • As a key player in the global supply chain, China’s economic progress will have an impact on the future direction of the world’s largest trade bloc, the Regional Comprehensive Economic Partnership, and the global economy.
  • Several secular trends are paving the way for growth in Asia, including digitalisation, cloud computing and e-commerce.
  • Identifying those companies with the potential to generate consistent, solid growth, supported by durable growth trends, will be key for successful investing.

Evolving global trade patterns


It has been more than a year since COVID-19 was declared a global pandemic. The start-stop lockdowns that followed the first wave of the coronavirus outbreak made it particularly tough for many businesses and individuals to adapt.


While the pandemic continues, a health check on the global economy indicated a strong rebound in trade in the fourth quarter of 2020. 1 But the World Trade Organization warned that the momentum may be short-lived as export orders and automotive products are showing signs of deceleration.


That said, global trade remains on the path of growth and development. In November 2020, 15 countries in the Asia-Pacific region signed the Regional Comprehensive Economic Partnership (RCEP) agreement. They include the 10 ASEAN members together with China, Japan, South Korea, Australia and New Zealand.


It may be considered early days before the long-term benefits of the trade agreement become apparent, but the RCEP agreement in itself has created the largest free trade bloc in the world. The RCEP member countries together account for close to a third of the world’s population and gross domestic product.3


The world’s largest trade bloc is now in Asia-Pacific

Select regional free trade agreements, based on total 2019 GDP of member countries (in US$ trillion

Data as at 16 November 2020. GDP: gross domestic product. Sources: World Bank Group, Statista

China is well-positioned for future growth in both the domestic and global arena


China easily stands out among its RCEP peers due to its size. Being a key player in the global supply chain, China’s economic progress will have an impact on the future direction of the trade bloc and the global economy.


Recently, the country captured the world’s attention when news broke that it overtook the US as the European Union’s biggest trading partner. This should come as no surprise as China was the first country to shut down its economy to blunt the spread of COVID-19, and the first to return to some semblance of normality.


China today has its own highly developed internet ecosystem, following its persistent efforts to strengthen its digital economy and develop its own search engine, social media and e-commerce titans. The nation’s growing middle class continues to drive a powerful transition towards a more balanced economy spearheaded by domestic consumer spending. It is now home to an impressive 989 million internet users4 .


Underpinned by a powerful domestic demand engine, the Chinese government is focused on increasing domestic spending and unlocking the significant savings of the country’s populace, which are much greater than those of Western countries.


India is the next rising economic power


China’s savings rate is among the highest in the world

Pent-up consumer demand could help drive growth as countries gradually return to post-COVID normality

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Latest data available as of 31 December 2019. GDP: gross domestic product. Source: The World Bank

The transformation of the Indian economy is also underway. It is the only country the International Monetary Fund expects to register double-digit growth in 2021.


E-commerce, banks and real estate are some of the key sectors that could drive the economic recovery in India following a slowdown in 2019 and a harsh lockdown in 2020.


Industrial firms’ aggressive cost cutting during the past few years has laid the foundation for change in the country. Companies have slashed capital expenditure and reduced leverage, while the Indian government implemented the much-needed labour reforms. Bank balance sheets became healthier and interest rates have remained relatively low.


Against this backdrop, our research indicates that GDP growth in India may reach double digits in the 2022 fiscal year and possibly stabilise in the 6% to 8% range in later years.


 


1. According to the World Trade Organization’s Goods Trade Barometer report dated 18 February 2021.


2. Member states of the Association of Southeast Asian Nations (ASEAN) are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.


3. Data as at 25 February 2021. Based on 2019’s data, RCEP accounts for 29% of the world’s gross domestic product (GDP) and 30% of the world’s population. Source: The World Bank


4. Data as at 3 February 2021. Source: China Internet Network Information Centre (CNNIC)


 


Risk factors you should consider before investing:

  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
  • Depending on the strategy, risks may be associated with investing in fixed income, derivatives, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.


Julie Dickson is an investment director at Capital Group. She has 26 years of investment industry experience and has been with Capital Group for four years. Prior to joining Capital, Julie worked as the head of client portfolio management at Ashmore Group. Before that, she was the head of client portfolio management at Aviva Investors. She also held various positions at Axa Rosenberg, Mellon Global Investments, Barclays Global Investors and Merrill Lynch. She holds a bachelor’s degree in business management with concentration in finance from Cornell University. She also holds both the Investment Management Certificate and the Chartered Financial Analyst® designation. Julie is based in London.


 

Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.