Why underinvestment in Asia means missed opportunities

Asia is not just the world's fastest-growing region; it's rapidly transforming into a powerhouse of technological and industrial innovation which demands attention given the huge growth opportunities it offers investors and rapid economic growth.

Asia has long been recognised as the world's fastest-growing region, with its growth model continuously evolving over the years. The region's diverse economies enable the rebalancing of existing growth models and the creation of new ones. Future growth will be shaped by geoeconomic fragmentation, tech disruption, demographics shifts and evolving consumption patterns. As Asia continues to transform, it is expected to contribute to 60% of global growth by 2030.

Despite the region's rapid economic growth, Asia is significantly underrepresented in global financial indices and investors' portfolios. As of June 2024, Asia ex-Japan equity markets comprised a mere 9.38 per cent of the MSCI AC World Index. This underrepresentation is significant and suggests an overlooked opportunity given Asia's substantial contribution to global growth and its increasing role as a global innovation hub.

Asia has become a hub for global technology and economic innovation. As an example, Asia's fintech revenues are expected to be bigger than North America's by 2030. This growth in technological innovation is driving the strong demand for growth capital. In 2024, the Asia Pacific region maintained its position as the largest region for initial public offerings (IPOs), both in proceeds and volume, as the chart below shows. India in particular was a standout.

This strength in the IPO market underscores the region's importance and the potential for substantial returns on investment.

The strength of consumption and trade

The region's economic strengths include its rapidly growing middle class and trade volumes. Asia is the world's largest trading region, accounting for 53 per cent of the global goods trade in 2021. Asian countries are involved in 49 of the world's 80 largest trade routes. Asia's population accounts for approximately 59 per cent of the world's total, and the region's rapidly growing middle class has made domestic consumption an increasingly important economic growth driver, especially for India and Southeast Asian economies.

According to a report by McKinsey, Asia will account for one of every two of the world's upper-middle-income and above households in the period to 2030. The growing income levels in Asia will create demand for more types of goods and services. Research suggests that 78 per cent of total consumption in Asia is made up of basic goods, with "special treat" and "first luxury" items accounting for the remaining 17 per cent and 5 per cent.

This huge consumption for both staple goods and more sophisticated consumer offerings, is helping to underpin Asia as an attractive and resilient area for long-term investment.

'China plus one' strategy underpins growth in region

As it stands, the underinvestment in Asian markets is not just a matter of missed opportunities; it also reflects a misunderstanding of the region's economic realities. Asia's diverse economies are quick to adapt to new challenges, such as technological disruption and fostering the development of new business models, which are powering innovation and Asia's economic growth.

The 'China plus one' strategy, where companies diversify their supply chains beyond China, is already boosting the economies of ASEAN countries and India. This shift is further strengthening Asia's position as a crucial global supply chain hub, as companies leverage the differentiated strengths of nations across the continent, not just in China. Asia too is rapidly becoming a hub for cutting-edge advancements in areas like fintech, electric vehicles and renewable energy innovation and production.

Still, global investors are often overlooking Asia's growth opportunities. The region presents unparalleled opportunities to invest in underappreciated and undervalued growth companies. Buying up such assets while they are trading at attractive valuations, in contrast to overvalued US shares, should be a key strategy for global equity investors keen to capitalise on the region's potential.

Companies fall into distinct growth buckets

Asia's diverse blend of mature, advanced economies and high-growth potential emerging economies offers dynamic and unparalleled opportunities. Investors can balance risk and reward by understanding the various economic landscapes and the growth profiles of different sorts of companies, be they quality, emerging or cyclical businesses.

Quality growth companies tend to be the longest held, core positions within our portfolios as they provide stability in the underlying growth dynamics of the portfolios. That said, these companies may still be affected by idiosyncratic country economic cycles or industry specific cycles. In these cases, the actual active weights may vary depending on the timing of these cycles even though they are held as a core active position for extended periods. There is some overlap between this segment and cyclical growth companies as position sizes are determined by the timing of the cycle.

The key to doing well with cyclical growth companies is to time the industry cycle for their specific industries. This requires close monitoring of industry and company fundamentals and leverages our previous experience investing in these companies and sectors. We typically try to exit these companies in the upturn and not hold on to them in a downturn.

We strive to identify emerging/structural growth companies as early as possible in their growth cycle when there is the longest runway for growth and hence the highest appreciation potential. As a result, we typically hold the largest active positions in these companies earlier in their growth cycle as well and reduce them as these expectations are realised.

As growth investors, we seek to identify and invest in underappreciated growth opportunities that are trading at attractive valuations. The rewards are rich. Investors who recognise Asia's potential, embrace the region's diverse economic landscape, stand to benefit from the region's immense growth potential. It is time for the world's capital to move beyond perceptions and understand that Asia is not just a region to watch, but a region in which to invest well.