A new superpower is emerging. Asia is becoming increasingly important in the global economy, powered by the twin powerhouses China and India. The continent is now home to over half of the world’s population and 21 out of the world’s 30 largest cities.1 Asian economies have expanded rapidly over the last two decades, contributing 2/3rds of the world’s economic growth, and expected to eclipse the rest of the world by next year as share of global GDP (exhibit). China is the second largest economy in the world after the US and remains one of the fastest growing, while India is now the world’s third largest economy.1 Healthy growth in smaller economies has also contributed to Asia’s surge. Many countries in South and South East Asia – including Vietnam, the Philippines, Cambodia and other ASEAN2 countries – are enjoying growth rates on par with or faster than China’s. This year, Singapore and Hong Kong overtook the US in the IMD World Competitiveness Ranking for economies, coming in first and second respectively.3
Self-Sustaining Growth Powered by Home-Grown Consumption and Innovation
Asia’s economic growth has evolved away from dependence on exports to home-grown consumption and innovation. The large young population in these countries, along with the rapid expansion of the middle class population, will continue to be a powerful driver of consumption growth, wealth creation and innovation. Asia boasts the fastest growing middle class in the world, and will become home to more than half of the world’s middle class by next year.1 In addition, roughly 60% of the world’s young population (ages 15-24 as defined by the United Nations (UN)) live in Asia, with over 50% in India and China alone.5 China has an upper middle class that continues to expand rapidly and is expected to comprise 59% of the population by 20206, while also boasting the largest Millennial population in the world of 415 million. 65% of India’s 1.2-billion population is under the age of 35 and 54% are working age. The push towards domestic innovation is also transitioning Asian economies towards more stable and self-sustaining growth. We see evidence of continued progress with innovation in three ways: First, China welcomes a staggering 8 million college graduates each year, with a rapidly-growing number of advanced degrees particularly from Science, Technology, Engineering and Mathematics (STEM) disciplines.7 Second, the Chinese government has been focused on supporting the rapid expansion of its infrastructure and facilities – Beijing’s Zhongguancun district was ranked as 2017’s top technology hub in the world, beating out Silicon Valley.8 Third, China has seen a significant increase in research and development (R&D) expenditure, surpassing Japan and the European Union in total R&D spend.9 One example of successful innovation is mobile payment systems developed in China, India and the rest of EM which have leapfrogged developed markets (DM), given local banks’ traditional focus on the corporate market and underinvestment in retail offerings. Spurred by the increasingly domestically-oriented economy, IPOs have accelerated in Asia, presenting a compelling investment opportunity. The number of publically-listed equities has increased 133% since 2000, and IPOs in Asia have generated ~6x the return of the MSCI EM index on average over 5 years.10
Attractive Entry Point for Potential Further Outperformance
Investors are structurally underexposed to Asian equities relative to its share of global population, GDP and equity markets. Despite ongoing uncertainty around trade tensions between China and the US, we continue to believe Asian equities offer a compelling long-term investment opportunity given economic expansion, transition towards a more self-sustaining economy driven by consumption and innovation, strong earnings growth potential and attractive valuations. Asian equities are currently trading at a 16.0% discount to DM equities and a 23.3% discount to US equities, while offering higher expected earnings growth of 8.2% over the next 12 months, compared to 6.8% for DM equities and 6.9% for US equities.11 Indian and Chinese equities boast even higher expected earnings growth at 18% and 16% respectively over the next 12 months.12 Finally, Asian equities are poised to become an ever growing portion of the global equity index, as China’s weight in the MSCI EM Index is expected to increase from ~30% currently to ~42% with MSCI’s plans to expand the portion of China A-shares in the Index from the current 0.8% to potentially 16.2%. We believe Asian equities are becoming too hard to ignore given the economic and growth fundamentals, and we are focused on finding diverse and attractive investment opportunities beyond the benchmark, leveraging our global presence coupled with local expertise.