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A look into the future of investing in Asia
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.


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 members1 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.2


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.


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


Secular trends that are paving the way for growth in Asia


We have been paying close attention to the long-term secular trends that are emerging in Asia whilst developing a deeper understanding of the region’s unique demographic profiles.


These are areas where we found some of the more interesting secular growth opportunities:


 


Everyday services enabled by mobile technology


Among the secular trends that will likely continue to flourish are the growth of digital platforms targeting large and growing consumer bases, particularly through mobile technology.


One potential beneficiary of digital adoption in India is Reliance Industries. The Indian conglomerate has built one of the world’s largest telecommunications networks, with a subscriber base of over 410 million3, in just a few years. In the financials sector, the larger private banks have been growing profits and gaining market share, partly by reaching new customers in rural areas through mobile apps. They are well-positioned to scoop up some of the country’s weaker lenders.


Another phenomenon that is being powered by the rapid adoption of mobile internet is an increasing pool of home-grown social media networks. China, in particular, has some of the world’s largest social media networks, despite many of them operating only domestically.


Mobile internet adoption is empowering billions


Number of mobile broadband subscriptions in Asia (millions)4


Based on latest available data as at 9 March 2021. Source: International Telecommunication Union (ITU)


Secular growth of e-commerce and digital payments


Asia-Pacific is expected to account for over 60% of global retail e-commerce sales in 2020, over three times that of the US.5 Although e-commerce in some Asian countries is at a higher penetration than the US and Europe, the total addressable market is far greater due to Asia’s larger, and growing population.


In tandem with e-commerce growth is the increased usage of digital or mobile payments in the move towards a cashless society. In places like China, South Korea and other Asian countries, tap-and-go payment apps have been widely used for years.


India, in particular, has witnessed a sharp increase in adoption of digital payments. Elsewhere, Singapore-based Sea Ltd is tapping into both the e-commerce and digital payments markets in Southeast Asia, where such services are in high demand from the young and tech-savvy population.


Asia-Pacific has become the world leader in digital payments


Global digital payments revenue


For illustrative purposes only.
Source: World Payments Report 2020 from Capgemini. 2020-2030 are estimates. Figures reflect all non-cash payments. No third party whose information is referenced in this report under credit to it, assumes any liability towards the user with respect to its information.


Growth in biotechnology, with support from the regulators


Chinese leaders are seeking to cultivate a homegrown biotech industry. As an example, domestic start-up Wuxi Biologics has been enhancing its research and development capabilities to accelerate its discovery and manufacturing processes in biologics.


Regulators have also accelerated approval times for cutting-edge therapies, extended patent protections, clamped down on corruption and expanded government spending.


Equally notable, the government is allowing foreign drugmakers to tap into China’s vast market. Regardless of the push to bolster domestic businesses, Chinese leaders want their citizens to benefit from the most effective medications.


South Korea is also making efforts to promote its biotech industry. One of the companies that has thrived there is Rokit Healthcare. It created the world’s first sterile, all-in-one 4D6 organ regenerator, which it named Dr. INVIVO and has successfully tested its diabetic foot ulcers regeneration platform on patients in India.


 


The ripple effect from the revival in travel demand


Before the COVID-19 pandemic, around 150 million people in Asia travelled for the first time each year. Over the next 20 years, the region is expected to account for around 50% of incremental air traffic7, fuelled by the rapidly rising middle class population.


A revival in travel demand in Asia and other parts of the world could have a powerful ripple effect, creating the need for a range of goods and services and helping drive jobs growth across a variety of industries. Among these are aircraft manufacturers, jet engine makers, hotels, casinos and restaurants. In the absence of significant local players to respond to this demand, multinational companies like Airbus and Boeing could potentially benefit as the commercial aircraft duopoly can fill the gap when global air travel resumes.


Air travel is a secular growth industry, supported by Asia’s emerging middle class


Annual number of flights per capita


Data as at 2018. GDP: gross domestic product
Annual number of flights per capita, source: World Bank and CIA World Fact Book
GDP per capita, source: Airbus


Thriving in a post-COVID world


Should investors expect more volatility in the years ahead? Many companies in industries that have been hit hard during the COVID downturn have seen a pick-up in valuations as markets priced in a global recovery on the back of the vaccine rollout.


In light of the current market environment, finding companies with the potential to continue generating solid growth in the future while supported by durable growth trends like digitalisation and global payments will be key.


However, a greater dispersion of company valuations can be expected when market volatility returns. When that happens, prudent stock selection will help investors identify the potential winners.


 


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


2. 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


3. Data as of 30 September 2020. Source: Reliance Industries


4. Data as at 2019. Source: World Bank. Asia total includes China, India, Korea and ASEAN


5. Source: eMarketer, May 2020


6. 4D bioprinting precisely dispenses living cells and biomaterials layer by layer, creating structures that follow native human tissues and biological systems, which are often further incubated to proliferate, mature and change over time. This dimension of time makes the bioprinting 4D. Source: Rokit Healthcare


7. Source: Boeing Commercial Market Outlook 2020-2039



 

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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.