Notably emerging Asia’s markets have disappointed over the last decade. In fact, returns of stocks and bonds have lagged those of global indices, despite the region represented about 70% of world GDP growth in the same period. However, emerging Asian countries are now experiencing improving growth prospects, low inflation, a credible commitment to reform and an increasingly diversified economy. At the same time, their developing economies are characterized by significant challenges ranging from China’s debt pile, shifting demographics, climate change and weak governance. But many of these challenges can be overcome with a combination of technological development, innovation and political and social reforms.
Investors expect equities to be amongst the top performing asset classes over the next five years, with returns around 11% per annum in US dollar terms on average. China and Vietnam should delivered particularly well. Within the fixed income space, China’s government bonds currently offer the best risk/return curve while investment grade corporate bonds also look attractive. To capture most of the opportunities in the region, allocations will need to be re-considered.
Most promising investment themes in China include shifting consumer patterns, increasing e-commerce, rising credit penetration and digital transformation. In addition, new climate targets will require government policy support to the green economy and private capital is likely to flow into related industries.
In the rest of the region, investors see further potential in semi-conductors and financial services. Despite production of semi-conductors increased, it remains a highly specialized process. Pricing power and barriers to entry are high and require specific equipment, as well as access to materials and chemicals. That makes it an attractive industry. At the same time, shifts in demography have generated a huge pool of savings and demand for financial planning. Wealth across the region is also growing, benefiting industries such as high-tailored banking and wealth management. Technology will most likely amplify and improve their inclusion.
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