The rise of emerging Asia

Overview

Emerging Asia's stocks and bonds have experienced a lost decade. Over the past 10 years, their returns have lagged those of global indices by a considerable margin. And that is despite the fact that these economies accounted for about 70 per cent of world GDP growth over the period. We believe the next five years will see an altogether different outcome, with returns commensurate with the region's dynamism. This means Asian assets are currently under-represented in global portfolios.

That is the conclusion of our analysis of emerging Asia¹, a region characterised by improving growth prospects, low inflation, a credible commitment to reform and an increasingly diversified economy.

We expect emerging Asian equities to be the best performing asset class over the next five years, with returns averaging around 11 per cent per annum in US dollar terms. Vietnam and India should do particularly well.

Within fixed income, meanwhile, China’s government bonds offer the best return/risk profile while investment grade corporate bonds also look attractive.

To make the most of this opportunity, allocations will need to be both directly in Asian companies (as opposed to indirect exposure via developed market companies with exposure to Asia) and active. An active approach is essential because the divergence in returns for Asian asset markets increases the scope for excess returns. In addition the the economy is changing rapidly in areas such as e-commerce, green technology and financial services, sectors where Asia could become a global leader. 

Currencies offer an additional source of return. Our models show the region’s currencies are among the most undervalued versus the US dollar, and we see good reason for that to change. The region runs a current account surplus, its monetary policy is far less expansionary and, in the renminbi, it has a currency that will soon begin to challenge the greenback’s dominance of the financial landscape. 

Of course, there are risks. Asia’s developing economies face significant challenges ranging from China’s debt pile to those that won’t be resolved for decades, not least deteriorating 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.