It’s often been said that we’re witnessing the beginning of the Asian century, an era defined by a new economic hegemony with the continent at its heart. It’s a perspective that we find difficult to challenge—the facts add up. Where we’re concerned, a window of opportunity has opened for those of us who are in search for the next growth spurt that can propel the world economy forward. As much of the developed world marches past its economic peak, Asia¹ is set to come into its own, providing an opportune moment to reassess its potential in relation to the global economy.
- Asia’s economic landscape has transformed significantly in the last 20 years, supported by China’s rise as an economic force. The region’s growing foreign exchange reserves and higher credit ratings reflect the continent’s much strengthened economic fundamentals. Barring major surprises, the continent is poised to become the world’s dominant growth engine in the next few decades.
- The continent’s financial markets have come of age: the inclusion of Chinese local bonds in widely followed global indices represents an important milestone for the region’s fixed income market, signaling its growing maturity. Similarly, Asian companies have become the largest users of public equity markets globally,² accounting for a significant chunk of global market capitalization. Together, they represent an interesting opportunity set for investors.
- Manulife has more than a century’s experience of doing business in Asia, along with our extensive presence on the ground, we believe we’re wellpositioned to help global investors tap into this compelling opportunity set.
1997–2019: a transformed economic landscape
Serious economic reforms take time, but when executed well, the benefits can be far reaching. Asia’s economic landscape has transformed beyond recognition in the two decades since the Asian financial crisis, thanks to policymakers in the region who worked relentlessly to prevent history from repeating itself. The outcome speaks for itself—Asian economies not only bounced back but, to a large extent, displayed resilience during the global financial crisis in 2008 and the taper tantrum in 2013. Crucially, China emerged as an economic powerhouse and played an important role in restoring global growth in the aftermath of the crisis.
You don’t have to look very far to see the extent of the economic transformation that has taken place in Asia in the last two decades; the statistics speak for themselves.
Most Asian countries and territories have seen a significant improvement in their credit ratings and, notably, a significant buildup in foreign currency reserves.
Their achievements take on more significance when compared with other emerging-market (EM) economies: As of this writing, total foreign reserves for Asian countries and territories stood at US$5.67 trillion, up from US$2.27 trillion at the end of 2006. Notably, the region’s share of foreign reserves within the EM universe rose markedly in the last 12 years.³
These developments don’t happen in a vacuum; a stable geopolitical backdrop also played a part. There might have been a time when political risks deterred investors from venturing into the region, but those concerns, we believe, may no longer be as relevant. India and Indonesia—two of the biggest economies in Asia—held national elections recently. In both cases, voters chose to keep their respective incumbent leaders in office. This has important implications for investors: At the very least, it suggests a continued commitment to economic reform and that negative surprises on the policy front are unlikely. If anything, the outcomes of these elections are more likely than not to place both economies and, by extension, the region on a more positive economic footing.
Asia as an anchor of global growth as the region’s middle class rises
Much of the excitement around Asia has to do with its growth prospects. Several independent studies have suggested that the region’s output could account for more than half of the world’s gross GDP by 2050, up from roughly 36% last year.⁴ Notably, in purchasing power parity terms, Asia will soon be home to three of the world’s five biggest economies, namely China, India, and Indonesia (the other two being the United States and Brazil).⁵ Crucially, wealth creation in Asia is rising at a rate that’s surpassing any other region globally.
The Asian Development Bank predicted that around 3 billion Asians will join the ranks of the affluent in the 40 years between 2011 and 2050.⁶ A more recent study concluded that the majority of the next billion middle-class consumers—nearly 90%—will be Asian,⁷ an observation that’s supported by wage growth recorded in Asia in the last 17 years. Their consumption needs will evolve as their disposable income rises, enabling them to pursue a lifestyle that reflects their higher earnings.
From a demographic perspective, they represent a very important group, as their demand for goods and services will contribute to economic growth and create new opportunities for global businesses. It certainly doesn’t hurt that the level of household debt in emerging Asia, where the majority of these new middle-class consumers will come from, remains lower than their counterparts in the developed world.
China’s financial market comes of age, bringing Asia into focus
The recent inclusion of Chinese bonds in global bond benchmarks and MSCI’s decision to quadruple⁸ the weighting of China A-shares in its widely followed indexes later this year are milestones that mark the coming of age of China’s financial markets. As investors’ focus on China broadens to include markets in the region, the continent— after years of reform—is finally ready to ride the wave of rising investor interest.
The Asian fixed-income market
Asia is home to many diverse economies, each at a different stage of the development cycle—the same is true when it comes to the maturity of each country’s bond market. But it’s fair to say that the region has made substantial progress in improving market infrastructure, particularly in the area of settlement and clearing systems, as well as the regulatory framework that governs the functioning of the market. The growing depth of key individual markets, which is often expressed as a percentage share of GDP and broadening investor base, is also a positive development.
The region’s fixed-income market is valued at around US$17 trillion⁹ (local currency bonds and U.S. dollar bonds) and its growing importance is reflected in the region’s dominance in widely used EM bond indexes—for example, Asia accounts for about 60% of the J.P. Morgan Government Bond Index-Emerging Market Broad Index, which tracks the performance of local currency government bonds, and roughly 45% of the J.P. Morgan Corporate Emerging Bond Index.¹⁰ Statistics also show that the Asian local currency bond markets have deepened significantly since 2005: The bonds-to-GDP share in China rose from 39.1% in December 2005 to more than 80.0% by the end of last year. A similar development can also be observed across Asian countries such as Malaysia, Thailand, and South Korea.³
Encouragingly, the investor base for Asian local currency bonds has also expanded in the last decade—where the market used to be dominated by domestic banks, local institutional investors such as pension funds and insurance companies have come on board. This increased diversity has contributed to stabilizing the market as a whole. The participation of Asia-based institutional investors is particularly significant because as an investor group, they’re less likely to leave the market at the first sign of volatility and thereby take on an unofficial role as anchors for the market in times of stress.
Separately, two key developments took place in the last two years that will have a significant impact on the region’s fixed-income market. Unsurprisingly, they both relate to China: the establishment of the BondConnect program,¹¹ which made China’s bond market more accessible to global investors, and, more recently, the inclusion of Chinese bonds in global bond indexes. These developments have been described as game changers for the Chinese bond market. Estimates of the amount of fund inflows as a result of these developments in the coming years range from hundreds of billions to trillions.¹² A recent survey showed that more than 40% of global institutional investors who participated in the exercise indicated that they plan to increase their allocations to the asset class in the next 12 months.¹³ While no one can reasonably expect to know the exact amount, it’s clear, however, that the expected inflow will be substantial.
Asian companies have emerged as the largest users of public equity markets globally in the last 20 years. As of the end of 2017, nearly half of the approximately 50,000 listed companies globally were listed on Asian stock exchanges, accounting for roughly 40% of global market capitalization. In the decade between 2008 and 2017, 11 of the top 20 markets that witnessed the most initial public offerings (IPO) were in Asia, with China accounting for the lion’s share of activities.² From a statistical perspective, the amount of value that has been created by listed companies in Asia speaks for itself—net profit from these firms rose 33-fold between 1999 and 2017.¹⁴ Impressively, leverage levels for these firms fell to near 20-year lows during the period even as their cash position grew.¹⁵
Corporate gearing in Asia is declining
Asian equity market can offer interesting opportunities to investors—after all, the region is home to many high-quality, well-run businesses, a good number of which are poised to capture a bigger share of the global market.
That said, the task of identifying such companies continues to be the preserve of professionals—the quality of Asian companies as a whole remains uneven, and it takes years of experience and skills to be able to separate the wheat from the chaff.
Assessing opportunities: key market developments
The escalating trade war between Beijing and Washington may have cast a shadow over Asia’s growth outlook, but it’s unlikely to significantly alter the region’s longer-term prospects. Monetary policy in the region remains accommodative, and unlike their counterparts in the developed markets, Asian central banks have room to maneuver should they need to act; interest rates in Asia are higher relative to the developed world, and despite healthy growth rates, inflation levels remain benign. In other words, policymakers in Asia have more ammunition that they can deploy to boost growth should it be needed.
While an appreciating U.S. dollar may dent Asian growth, an issue that’s particularly relevant at the moment because of the currency’s safe-haven status, most economists continue to believe that dollar strength will moderate in the medium to long term, not least because of rising U.S. deficits. Meanwhile, the U.S. Federal Reserve’s dovish tilt earlier this year could also help to dampen attempts to nudge the greenback higher.
The growth of intraregional trade in Asia in recent years will also likely help to cushion any fallout from the trade war. Most important, should a protracted disagreement lead to a shift in the global value chain, the region’s economies are likely to be well positioned to adapt to changes and tap into new opportunities.
Manulife’s ties with Asia date back to 1897. Our presence on the continent in the last 122 years has given us a unique perspective of Asia through the extensive network that we’ve built throughout the region. Our understanding of Asia extends far beyond economic prints and financial data. With 10 offices in Asia, we strongly believe that Manulife Investment Management’s asset management business is well positioned to help investors tap into the region’s potential.
At a time when much of the financial services industry is focused on rightsizing their research capabilities, we remain dedicated to engaging in high-quality, proprietary research. In our view, it’s a function that’s critical to investment success, particularly in a region where investor access to reliable, high-quality data can’t be taken for granted. For instance, our Asian credit research team covers about 500 companies, including those that aren’t rated by research providers or credit agencies. Most important, despite our boutique structure, we’re committed to sharing our research across investment teams and encourage constructive, open discourse.
Global growth prospects may be darkening just as the Asian century begins, but the dark clouds will clear over time. Critically, Asia remains poised to become the world’s most dominant growth engine in the coming decades. Volatility may rise as traditional economic alliances break down, but in our view, this creates an environment that rewards experienced active managers, particularly those who understand the importance of research. As an active investment manager with an intimate knowledge of the region, we look forward to the challenge.
1 Unless noted, references to Asia in this paper refer to Asia ex-Japan. 2 OECD Equity Market Review | Asia 2018, Organisation for Economic Co-operation and Development, November 7, 2018. 3 Bloomberg, as of March 31, 2019. 4 “Asia in Transition,” Credit Suisse Research Institute, November 2018. 5 “The World in 2050: How will the global economic order change by 2050?” PricewaterhouseCoopers, February 2017. 6 Asia 2050: Realizing the Asian Century, September 2011. 7 “A global tipping point: Half the world is now middle class or wealthier,” Brookings Institution, September 27, 2018. 8 “MSCI to quadruple weighting of China A-shares in its global benchmarks,” Reuters, February 28, 2019. 9 Asian Development Bank, Bank of International Settlements, December 2018. 10 J.P. Morgan, as of September 30, 2018. 11 BondConnect is an investment scheme that allows global investors and their counterparts from mainland China to trade in each other’s bond markets. The scheme started operating in mid-2017 and is mainly targeted at institutional investors. Unlike 2016’s CIBM Direct initiative, where account opening, trading, and settlement must be completed in the onshore market, these processes can be completed offshore through BondConnect. 12 “Economic Watch: Milestone inclusion of Chinese bonds marks accelerating financial opening-up,” Xinhua, April 1, 2019. 13 “Asian Fixed Income on the Rise,” Greenwich Associates, May 2019. 14 "The Asian Century is set to begin,” Financial Times, March 25, 2019. 15 “Take note of Asia’s world-class businesses or be left behind,” Financial Times, April 17, 2018.
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