Young, educated, tech-savvy and consumption-ready populations have long been key to economic growth. What economists, business strategists and investors should note is the outsized surge in these metrics for Asia today. Calling it a “swelling middle class” may be an understatement. 90% of the increase in global middle-class consumers in recent years has been in Asia. And this cohort could grow from 2 billion to 3.5 billion in the next decade. That’s about the same as total world population growth from 2001 to today. This growth in purchasing power is poised to drive a large and long-term fourth wave of change in global economic demand.
Demographic changes are one aspect of a rapidly changing world where international investors will need to view Asia through a fresh framework that recognizes how global technological, economic, and geopolitical power is becoming increasingly decentralized, no longer concentrated in the hands of a single country or region.
To effectively position for Asia’s long-term opportunities, investors need to understand the context and the dynamics of the underlying trends in the region and how they impact the rest of the world. There are three consequential developments that investors should be watching closely.
1. The fourth wave. After three growth waves, from post-war Japan to the industrialization of the East Asian Tigers, and, more recently, China, Asia is moving away from supply chain-based economies. At a record pace, its young and growing consumer class is leveraging converging trends as digital technologies.
Moreover, with a nearly 700 million-strong population, Southeast Asia is poised to produce 140 million new young consumers, nearly a fifth of the world’s total, over the next decade. The rise of Southeast Asia’s economies converging with China’s continued economic momentum will power growth in Asia.
Southeast Asia is likewise benefiting from previous growth waves and from Chinese investment. Despite Covid-19-induced challenges, Chinese investment continues to provide a platform for upgrading critical infrastructure in the region, with the priority seemingly evolving towards more green-energy projects and technology-related investments, couched in talk of a ‘green silk road’ and ‘digital silk road’.
This ‘fourth wave’ of growth will pull the world’s economic gravity east.
2. Asian tech leaving the West in its wake. Once confined to outsourced manufacturing or accused of copying Western technology, Asian companies are increasingly category-definers.
China’s largest tech companies compete internationally in artificial intelligence, cloud computing and entertainment. While Chinese regulators have recently stepped up scrutiny on some tech business models, causing short-term uncertainty for the sector, the long-term arch still looks to bend in China’s economic favour.
The world was already in an up-cycle of digitalisation and automation pre-Covid-19. In 2021, that transition could further benefit Asia. Singapore, South Korea, and Japan, for example, already lead the world in robot density in manufacturing.
Governments are also pioneering digital innovation in everything from identification to currencies. A shift to digital currencies could represent a leapfrog for financial inclusion and consumer spending, again bolstering the region’s economic clout.
3. The green energy revolution: Ninety-nine of the world’s 100 most environmentally exposed cities are in Asia as are 13 of the top 20 cities projected to suffer major increase in losses from flooding. All of this makes a ‘green transition’ an urgent priority.
Asia Pacific investment over the next 20 years could bring 2,673GW of renewable energy online in the region by 2040, more than double Europe’s projected installed capacity and over three times that in North America over the same period.
China, still the largest carbon emitter in the world, also has the world’s largest battery-electric vehicle market and is projected to see the sharpest growth in years ahead, with 2014-2015 a key turning point relative to the rival US market.
Asia has a lot to lose, and gain, from green infrastructure spending.
An Asia-centric destiny?
If economic growth, technology and green infrastructure are the pillars of Asia’s advancement, there are challenges ahead. The US-China relationship, China’s regulatory reforms to promote greater social equality, Covid-19’s continued threat, and climate change are all sources of uncertainty.
The relationship between US and China is having complex repercussions, driving investment into other countries as multinationals assess their operations, and forcing technology buyers and sellers to consider separate tech stacks, which could balloon everyone’s costs. Chinese regulatory changes may suggest an uncertain business environment for investors. However, in the long run, the impact may be positive on the whole.
Asia has already changed the world with three waves of economic transformation. A fourth is now building, drawing on past strengths and adding new digital-age capabilities. By 2040 the world could look very different, with Asia representing half of global GDP and 40% of global consumption—much of it originating from the Association of South-East Asian Nations.
In a changing world, these trends will be significant for dynamics in Asia, with profound implications for global asset allocation decisions.
More Global Markets Topics >
