Although the global economic outlook remains uncertain, Asia’s robust fundamentals and prospects still outshine those of Europe and the US.
The International Monetary Fund (IMF) predicts that Asia, with a growth of 4.6%, will represent around 70% of the world’s economic expansion in 20231. As such, bond investors who choose to look through short-term challenges could capture potential opportunities in a region that has adeptly negotiated a way through COVID and its volatile aftermath.
Despite the high social cost of COVID, Asian economies mainly performed better than expected during the crisis. This is likely due to the sustained efforts of governments and regulators to improve the management of their respective economies and provide bulwarks against global shocks. The benefits of this are reflected in robust growth and relatively low inflation compared to more advanced economies. Indeed, the Asian Development Bank (ADB) expects region-wide inflation to fall to only 3.3% in 20242.
Asia’s currencies have also reaped the benefits of prudent economic management by avoiding the challenges experienced during previous global shocks.
Asia’s banks have been relatively unaffected by turbulence in the banking sectors of Europe and the US. The ADB does not think that the problems experienced by mid-size US banks will trigger a more significant financial crisis3. The issues which toppled these lenders are not shared with most of the financial institutions in Asia, so any knock-on effects are limited.
The property sector in China has also been a historical concern for investors, but recent signs indicate that prices have stabilized and confidence is returning4.
The war in Ukraine led to soaring energy prices, but this spike has reversed, and prices have retreated to pre-conflict levels. In response to the war, Western nations placed a ban on energy imports from Russia, with this supply partially redirected to some Asian markets, particularly China and India, at a capped price below US$605. Given most economies in the region are net energy importers, a fall in energy prices provides a further boost.
The conflict also led to higher prices for agricultural commodities, which benefited those markets that are significant exporters and helped reduce the negative impact of elevated energy prices. While the military conflict in Eastern Europe is ongoing, the risks to the downside remain. Still, if lower energy prices persist, it will provide a positive environment for most Asian economies.
While Japan and South Korea, for instance, have meager birth rates, other economies in Asia still have higher natality rates than Europe or the US, despite declines in recent years. A higher birth rate helps underpin economic growth, given that a larger population provides an expanded labor force and potential consumer goods and services. Conversely, the lower reproductive rates and ageing populations of advanced economies could act as a possible brake on their economic growth.
Of note, the United Nations (UN) recently estimated that the population of India had exceeded that of China6. However, over the longer term, India’s birth rate is expected to fall as it becomes wealthier7.
Looking ahead, a growing Indian and Chinese appetite for imports from the wider Asian region may offset the impact of lower demand from advanced economies8.
The technology sector will continue to grow in importance as the region’s economies continue to modernize. Specifically, China is promoting the growth of domestic technology companies. This is in response to US and European attempts to limit the export of advanced technology to China on national security concerns9.
Companies in the consumer segment will also likely benefit as Asia’s burgeoning middle class demands high-end goods or better education and healthcare services10.
Meanwhile, commodity exports from several markets will continue to provide an essential source of foreign currency.
From an issuance perspective, the region also has a buoyant green bond sector, with companies and sovereign issuers incorporating climate-related factors into their corporate operations and public policy. Helping this momentum are moves by Asia’s regulators to make ESG reporting obligatory and a desire by governments to variegate their capital markets.
Therefore, the outlook for economic growth in Asia is positive, and while it may not be at the pace of past decades, it is likely to be stronger than the US and much of Europe.
The IMF expects real GDP growth for Emerging and Developing Asia will be 5.1% in 2024, while it anticipates that advanced economies will expand by only 1.4% 11. This stark divergence makes the region appealing to investors seeking to diversify their exposure to global fixed-income markets.
All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.
Past performance is not a reliable indicator of future performance.
Diversification does not ensure a profit or guarantee against loss.
International Government bonds and corporate bonds generally have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Currency Risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.
Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
The above expectations are estimates based on certain assumptions and analysis made by SSGA/Third Party. There is no guarantee that the expectations will be achieved.
The views expressed in this article are the views of Kheng-Siang Ng through the period ended 30 April 2023 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
This article is issued by State Street Global Advisors Singapore Limited and has not been reviewed by the Securities and Futures Commission.
This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.