Asia is at a crossroads: Here's what investors need to know

Fidelity International's Anthony Srom has seen plenty of the Asian Century's development in his time. Since joining the firm's Singapore team in 2006, he's led the charge on investment ideas from across the region right at a time when economies all across the region were booming. 

But a once-in-a-century pandemic has its way of altering the course. Asia was the least immune to this change.

Before the pandemic's full effects were felt, the Asian Development Bank calculated that the entire Asian economic zone represented 50% of global GDP and two-thirds of global economic growth. The current IMF forecast for the Asia-Pacific's GDP growth has been reduced repeatedly - now just 4.5%, hurt by China's slowdown and soaring inflation.

  

The question now is where to from here. Srom says the Asian century is at a "growing pains" moment as the tailwinds in the region's most consequential economy have passed. So which nations will pick up the pace? Or will the deglobalisation trend that started in Europe leave the world's most populous region at the crossroads, making investing there just that little bit more challenging?

To discuss all those questions and many more, Anthony joined us for an all-macro, big picture edition of Expert Insights.

Edited Transcript

What is the Asian Century? What stage are we in?

Anthony Srom:
I go back to when I was at university and had a lot of colleagues and friends from various Asian countries, and to them and to a young person, it was time to seize the moment, a time of strong growth, lots of opportunities for development within the region, and a lot of excitement. 

That was my initial perception and exposure to what is the Asian Century. What we've seen since then is rising GDP per capita, wealth, innovation, et cetera.

What stage are we at now with the Asian Century? Immediate words that come to mind are things like growing pains. 

What we're seeing is a lot of growth being developed in that region through debt accumulation, which as we saw with the Asian crisis, is not a sustainable path forward. We're seeing things like the corruption crackdown in China. You can take that as another positive, but again, it has the effect of slowing down development as markets must adjust. 

That's a higher-level summary of the current stage of the Asian century. I think it's a stage of transition and slight growing pains.

What are the key growth drivers for the Asian Century?

I think the key growth drivers for the Asian Century have evolved in the market's mind and my own mind, as well. 

Initially it was a matter of trade surplus, and mercantilism, which works up to a certain degree. But after that, what I've seen is a much greater appreciation for demographics being a growth driver, particularly for countries such as Indonesia, and India. And if you look at other countries such as China, I think the demographic tailwind has passed. 

But again, that mercantilistic mindset has seen a lot of credit accumulation within China that's allowed them to accelerate their growth and maintain the trajectory for longer than initially anticipated.

What are the key players outside of China?

I think the key players outside of China within the region, are India, Indonesia, and possibly Malaysia. The reason I say that is that Indonesia again has great demographics and natural resources. 

The only thing that is really holding Indonesia back is corruption. Can that be stamped out? Thus far the answer is no, but that may change. 

Malaysia has a lot of promise but has always underdelivered for very similar reasons to Indonesia. My experience of living in Asia for 16 years has been that domestic politics can be quite messy. But again, Malaysia's a country that holds a lot of promise. 

The third one in my mind is India. Again, looking at the demographics, low level of debt, the scope for increasing productivity, and positive regulatory backdrop with the incoming government, there are a lot of factors that are very supportive of growth.

How has the pandemic impacted the pace of growth in the Asian region?

COVID has definitely impacted growth in the region, and China is the epicentre of that. It's the largest contributor to GDP in the region, and the second biggest economy in the world and the zero COVID policy has really slammed the breaks on growth within China. 

The Chinese government has moved to more of a dynamic zero COVID policy. You can interpret that as you may, but I think that's seen a bit of an increase in mobility. China is very stop-go, stop-go at the moment. 

The growth within the region, I think, is definitely subpar versus what we saw pre-COVID, and part of that is just the policies that you're seeing being enacted in China. 

Culturally, the way Asia has dealt with COVID versus the West has slowed development, based on my experience living in Singapore and seeing how things have been managed. 

Their culture is one of stability, caution, and doing things gradually. For that reason we are seeing barriers come down within Asia, but much slower than the rest of the world. And that's therefore impinged on growth.

What investment opportunities have supply chain disruptions opened up in China?

We have seen a lot of supply chain disruptions. Some of the more foresighted companies that we've met were already shifting production out of China, primarily to ASEAN. So think Vietnam, a little bit of Cambodia. What's happened since COVID is an acceleration of that deglobalisation trend. 

Indonesia's popping up on the radar more, and so has Mexico which has a bigger end market in North America. in terms of other regions or countries, there's India, which is not seeing a hell of a lot of reassuring opportunities. That's on the radar, but it's a little bit early just yet.

What are some of the risks and challenges in investing in Asia?

Transparency is one that comes to mind, and again, that's something that's improving at the margin. Transparency can be anything from company disclosures to the way of doing business, corruption, et cetera. You've got to be really cognizant of that. 

The other challenges of investing in the region are sentiment swings and retail participation, although those can both also represent opportunities. Some markets in the region are not as institutionalised as the more developed markets. 

China, for example, has very high retail participation, and so its market can be very sentiment driven from time to time, in both positive and negative directions. That's a challenge, but it can also be an opportunity when things go your way.

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