The Asian-Pacific area is the fastest developing economic region in the world and South African investors should be paying more attention to the exceptional opportunities it offers. The IMF projects 4.6% GDP growth in Asian economies this year, with the region projected to add 1.5 billion people to the middle class by 2030.
The miracle of China, which has gone from an obscure agrarian economy to the world’s second-largest in the space of 30 years, is repeating itself across the region.
These countries, which include India, South Korea, Taiwan, Vietnam, Indonesia and Malaysia, are rapidly ratcheting up their productivity, driving faster growth which, in turn, supports a rising middle-class and rising income per capita. Their demographics are in their favour – they have a slowing birth rate but a young, growing working-age population. The ratio of dependent to productive individuals is flipping over as a result, creating what economists term a “demographic dividend”.
With the growth of the middle class, they are transforming from export-led to consumption-driven economies. Over the last few decades Western companies established low-cost manufacturing bases in the Far East, but have found their factories are now useful in serving the fast-expanding domestic markets. As the Asian economies have become more consumption led, they have become less sensitive to global growth shocks and have proved counter-cyclical to global economic cycles.
De-dollarisation and ‘reglobalisation’
Accompanying this growth is de-dollarisation – commodity consuming countries in the Asia-Pacific region are starting to buy key commodities in their local currencies or in currencies other than the US dollar. In the past, these countries' ability to invest in and grow their economies was constrained by their ability to earn dollars. Their reducing dependence on the dollar means they can now become more disciplined about long-term capital growth initiatives.
Another trend, sparked by supply-chain disruptions during Covid, has been the diversification of global supply chains, and this is creating opportunities for China’s satellite countries, such as Vietnam, Indonesia, India, and Malaysia. Although there are some concerns about China in particular, the rebuilding of global supply chains is driving foreign direct investment into the surrounding regions and catalysing economic growth.
Investors underweight
Despite almost 70% of global growth this year coming from the Asian-Pacific region, it makes up only about 13% of global equity indices, so investors are structurally underweight.
This is mainly because the capital markets in the region are less developed and less liquid than in the West. For many years, China, for example, apart from Hong Kong, was difficult to access for Western investors. India was also constrained for foreign investment, possibly amid concerns around the foreign ownership of local assets. But as the capital markets develop alongside the growth in these economies, these constraints are falling away.
What remains is investor sentiment, which at the moment is strained by the geopolitical tensions between the West and China. This should be viewed as a temporary setback rather than an out-and-out risk when weighed against the structural growth of the region.
Diversification opportunities
The Asian-Pacific region offers an amazing diversification opportunity for South African investors. South Africa is expected to grow at 0.2% this year based on SA Reserve Bank estimates while the IMF expects Asia to grow at 4.6%.
Apart from its impressive growth, the region is a key diversifier. South Africa's growth hinges on commodity prices – commodity exports make up nearly a third of the JSE, and we rely on these to drive current account balances and second-order earnings for financials and consumer companies. Asian-Pacific countries, on the other hand, are consumers of commodities, and benefit from weak commodity prices – their industries can produce more goods and become more profitable.
While the region is still fairly difficult to access on the JSE for the retail investor, opportunities are opening up. Opting for broader exposure to the region as a whole is preferable to favouring a particular country, and investors should take care to avoid single stock concentration.
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