Asia in Transition

The Emerging Asian economic and investment opportunity is undergoing a period of multifaceted, swift and exciting transition. The region’s share of global economic output is set to reach 55% by 2050 and its equity and corporate bond markets are on course to assume close to a 30% global share by 2030. Yet the means by which this activity is generated is being transformed, primarily motivated by an intensifying focus on sustainability. Upper-middle-income Asian economies are evolving from manufacturing export-led growth models toward greater output from service sectors, while large pools of domestic savings will progressively fund consumption as the engine of growth, thus rebalancing from debt-fueled investment. Asia's export mix is becoming progressively more value-added with a rise in domestic inputs, while directionally, trade is increasing intra-regionally. The "Made in China 2025" initiative embodies this evolution. However, rising labor costs are likely to encourage a redistribution of China's dominant export share among lower-income regional economies with thriving manufacturing sectors. This may be compounded by supply-chain diversification necessitated by ongoing US-China trade frictions.

Maturing Asian economies are losing their demographic dividends, while other lessdeveloped neighbors will continue to reap the benefits for the next decade(s). However, the rise in wealth creation among Asian households is the fastest of any global region, with 93 million people joining the middle class in the last seven years alone. This has far-reaching implications for spending and investment trends as discretionary income continues to grow. Geopolitically, Asia is witnessing a shift in balance as regional hegemonies projecting both soft and hard forms of power compete for influence with conflicting agendas. China’s signature "Belt and Road Initiative" is a natural consequence of rising confidence in its unique economic and political model and a willingness to export it. Smaller nations drawn into this struggle must therefore try to protect their interests with the most favorable economic and security alliances. Administrative reform programs addressing labor-market inefficiencies and investment in human capital are set to further boost productivity. This, in combination with enhanced governance and quality of institutions, will serve to strengthen corporate profitability and long-term value creation. Growing equity and fixed income supply from the deepening of Asian capital markets will increasingly be absorbed domestically as deposit-saving pools seek higher rates of return in an environment of strengthening retail investment culture. We expect an institutionalization of these assets toward pension, insurance and mutual funds.

Finally, technological innovation and adoption has transformed Emerging Asian economies, with gains in mobile connectivity and internet penetration going hand in hand with increased financial inclusivity. Innovative technologies will continue to enhance efficiencies and expand access to services, thus presenting both exciting opportunities and threats to servicesector incumbents, altering financing, payments and spending habits and acting as a strong disinflationary force.

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