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Asia is accelerating

Fidelity

Fidelity - Research team

In the last two decades, Asia has become a powerhouse of global growth.

Demographics and digitalisation have fuelled economic and business expansion, and in 2020, this has played an important feature in the management of the COVID-19 crisis and the region’s resilient economy. Looking ahead to a post-pandemic world, we believe a new economic order will prevail, and Asia’s enduring role in driving global growth will continue.

It is already apparent that new winners will emerge as opportunities arise from dislocation and existing trends accelerate. Countries in Asia with younger populations and growing middle classes will have consumption tailwinds and offer some of the best growth opportunities, first in technology, and later in leisure and travel. Economies will shift from globalisation to regionalisation, and countries with large local regional populations will benefit.

For investors seeking long-term growth and diversification, the case for investing in Asia now is as strong as ever. However, with more volatility expected and an increasing bifurcation at a country, sector and company level of the winners and losers of the next decade, local expertise and a selective approach will be paramount.

Four Asian countries - China, India, Japan, and Indonesia - are likely to be in the Top 5 of the world's largest economies by 2024

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Source: World Economic Outlook, IMF, Statista, as of July 2020

Asia is home to 60% of the global population (4.5 billion people)

How demographics and technology are driving growth

With more and more people being lifted out of poverty, income levels across Asia are also increasing. This rise in the middle-class population is expected to drive significant demand for goods and services in the region during the next three decades.2

As a region at the forefront of the technology industry, the digital revolution has brought even greater momentum to Asian economies. In the last 20 years, technology innovation has accounted for nearly a third of Asia’s per capita growth.3

Asian companies are exploiting recent advances in artificial intelligence (AI), robotics, cryptography and Big Data that promise to reshape the global economy and fundamentally alter the way we live and work, in the same way that the steam engine and electricity did in centuries past,’ says Tahsin Saadi Sedik, Senior Economist in the International Monetary Fund’s Asia and Pacific Department. ‘In Asia, as elsewhere, the digital revolution is rippling across industries, from retailing and banking to manufacturing and transportation.’

Estimated middle class consumer spending in the Asia Pacific region

2015 to 2030 in trillions of 2011 Purchasing Power Parities US dollars

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Source: Fidelity International, Bookings, Inner circle data is for the year 2015 and the outer circle is for the year 2030. OECD Development Centre, 2017.

How demographics and technology are driving growth


In 2020, the global lockdown from COVID-19 has accelerated demand for a variety of services and has broadly benefited companies with solid online propositions. Many of those companies reside in Asia, as do many stocks across the numerous sectors expected to benefit from the adoption of 5G technology.

In China, working from home has boosted the need for cloud services, which are in their infancy and ripe for expansion; mobile phone time surged to over five hours per day and time spent gaming on Tencent titles Honour of Kings and Game for Peace surged to two to three times the prior monthly run rate. With social distancing a feature in many countries for some time to come, this is likely to further accelerate these trends.

We expect this will put Asia at the forefront of the digital revolution and, with a large younger domestic population, at an advantage to lead the recovery and drive global economic growth.

Supply chain resilience


COVID-19 has also accelerated trends already developing across supply chains. In the short term, as trade and economic activity in the region recovers from its nadir earlier in the year, intra-Asian trade – which for most economies in Asia already represents most of their exports and imports – is accelerating. As industries and governments factor in the learnings of the pandemic, proximity will increasingly feature as a factor to overcome the friction of travel and transport in supply chains.

Over the long term, we believe the disruption of supply chains during the COVID-19 pandemic, along with geopolitical tensions, will drive a more regional approach to trade.

We expect to see the rise of regional economic centres where growing demand from large economies such as China or India fuel growth in other developing countries nearby. This shift in supply chains will benefit countries in Asia with large domestic economies, large neighbouring economies and rising middle classes.

An ever-changing economic landscape


At the stock and sector level, we’ve seen the rise of digital innovation in Asia, with Chinese internet giants Baidu, Alibaba and Tencent snapping at the heels of their FAANG (Facebook, Apple, Alphabet, Netflix, Google) counterparts in the US. But these large-cap players are just a part of the tech enterprise movement in Asia.

There has been a recent surge in new digital businesses that don’t yet feature in broad market indices. Investors looking to capitalise on tech innovation and growth in the region need to look beyond established stocks and indices.

Three of the MSCI AC Asia ex Japan top ten holdings come from the information technology sector.

Are investors missing out on Asia?


Despite the strong economic and demographic trends in this region, Asian companies are under-represented in global equity indices. In the MSCI AC Asia (ex-Japan) Index, Asian stocks (excluding Japan) make up just 10.3% of the index.4

When you consider that indices like this are used as benchmarks, many investors can expect to be underweight in their allocation to Asian equities.

An active approach is needed


If you’re getting exposure to Asia via a market index dominated by commodity-based and industrial companies, you may be missing out on tomorrow’s growth drivers. Health care, consumer discretionary and services are under-represented in market-cap weighted indices, and much of the index is still laden with state-owned enterprises and ‘old economy’ companies.

Active managers, who are not beholden to the index, can capture these opportunities because they take a forward-looking approach to allocating capital and aim to invest in companies well positioned to benefit from the long-term structural developments.

Even before the impact of COVID-19, China’s health care industry was expected to be worth US$2.4 trillion by 2030.5 While health care in the US is the second-largest sector by market cap, it ranks only eighth in China, suggesting that the sector is still early in its development and is well poised to deliver strong future growth., which speaks to the importance of this industry in the Asia growth story.

Expert access to the best investment opportunities in Asia


Fidelity has been on-the-ground doing business in Asia for more than 50 years. Our deep knowledge of Asian markets and immersion in the local culture gives us a unique view of factors shaping returns across this dynamic market.

Drawing insights from more than 40 analysts based across the region, we use our research-led approach to uncover great businesses. Access the growth story of Asia with a manager fluent in investing in Asian markets.

1.worldometers.info/population/countries-in-asia-by-population† 2.The Brookings Institution, The Unprecedented Expansion of the Global Middle Class, 2017. 3.IMF Data, The Digital Revolution in Asia, April 2019.4.Fidelity International/MSCI All Worlds Index, 31 July 2020. 5.China Daily, https://www.chinadaily.com.cn/life/2017-08/15/content_30638162.htm6.TSMC Annual Report 2018.

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Unless otherwise stated, dated as of March 2021.

21CH0333 MK12398

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