2 booming markets amid the economic storm

Andrew Swan: We don't have an inflation problem in these countries. Historically, when the world has been so strong, you would, but this time around we haven't. And that's a really good setup because with high inflation you deal with high interest rates. But if you're a small economy like Indonesia or the Philippines, your interest rates and monetary policy are very heavily influenced by what's going on in large economies like the US. Because if your interest rates are going a different direction to say what's happening in the US, people tend to take money out of your economy and put it into larger economies. 

The problem with that is you drain liquidity, you tighten financial conditions, as that money flows out. So central banks in the region have actually been increasing interest rates in sympathy with the Federal Reserve because they're afraid that if they don't, money will leave to go to the US.

And so, while there is no inflation problem, interest rates are high. Now, interest rates are very high relative to their historic range, but inflation is at the low end. The opportunity therefore is as the Federal Reserve in the US comes to a halt in terms of its increases and potentially even starts to cut rates next year, central banks in this region will be empowered to cut rates quite aggressively, and that will stimulate further demand within these economies.

LW: What are the risks of investing in these regions? 

Andrew Swan: We do see a lot more volatility. It is an emerging market, mostly. Policy is evolving. As I said, to a certain degree, some economies are more driven by what's going on domestically, but some are very exposed to what's going on globally. And so, you have multiple factors that can influence the outcome, both domestic and international, and you need to incorporate all of these in your decision-making. 

I would say geopolitics is a big problem right now for parts of Asia, particularly China. It's running into some challenges around how it integrates into the rest of the world because of geopolitics. And that's something people need to take into account because I think in the last 18 months we have seen capital investment starting to move out of China because of these geopolitical concerns. China's export share into the US has been declining because of things like higher tariffs, and now, new policy as well.

So these are international factors that you need to incorporate into your decision-making. It would be great to say a certain company is only driven by what's going on in that company, but it's a region that is influenced heavily by many factors, both local and global.

LW: Where are you seeing the most opportunity?

Andrew Swan: South Asia, absolutely, because it's a domestic demand-driven economy without, in most situations, a lot of debt either and rates potentially coming down. 

I would think the other area in China, which we haven't touched on, is really around the technology sector. Asia has, actually, some very good technology companies. And what we've seen this year is the advent of generative artificial intelligence, things like ChatGPT. It's a technology that's being developed in the US and in the West, but the technology that powers it, the semiconductors, is actually developed in Asia, in places like Taiwan and Korea. And then within servers that go into data centres, a lot of those servers are created in Asia.

Asia has a very good technology hardware sector that is going to benefit from this new demand driver, artificial intelligence, particularly generative artificial intelligence. And like all good things, maybe they're overhyped in the short term and underhyped in the long term. I kind of feel that about artificial intelligence right now. The direction of travel is very clear, but what it looks like in the next one, two, three, five years is still to be determined. But Asia has a lot of good companies that we do think will benefit from the development of this area.

LW: Can you provide some examples of positions in South Asia? 

Andrew Swan: There are some very good private sector banks in countries like Indonesia and India, which are doing well as we speak. There are high-quality companies with low credit penetration in these economies. So, a long runway of growth. So if you can avoid all the problems that we talk about with structural issues and geopolitics and just focus on a good company with a long runway to growth, banks in Indonesia and India are a really good example of where you can find opportunity.

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