Investing in the Rise of Asia


Last year’s Covid-19 outbreak has had a significant impact on global economic growth and caused a dislocation in regional equity returns. Asian equities have generally been net beneficiaries of this dislocation as they lead the world out of the pandemic with North Asia specifically benefitting from a strong tailwind to technology stocks. As growth has slowed down globally and the path to an economic recovery remains unclear, investors continue to look to Asia for diversification and excess returns. Year-to-date1, MSCI Asia index and MSCI AxJ index have gone up by 5.6% and 8.7% respectively, outperforming the S&P 500 (+3.0%) and ASX 200 (+3.8%). Within the region, China has been a bright spot with MSCI China gained 13% YTD, followed by MSCI Taiwan (+12%) and MSCI Korea (+7%). A common trait for these three countries has been their relatively successful Covid-19 containment efforts, in tandem with a higher concentration of their economies to tech. Despite strong outperformance YTD, Asian markets continue to hold compelling valuations. We believe Asia is a ‘must-have’ component in investors’ portfolios. 

BlackRock Investment Institute: Why we favour healthcare

  • Potential benefits from structural trends such as demographic shifts, emerging market healthcare spending growth and innovation across the board.
  • Vaccine-led economic recovery could drive an increase in elective procedures postponed owing to the pandemic.

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Leading Covid-19 recovery

Due to the Covid-19 pandemic, most countries have imposed stringent lockdown measures to contain the spread of the virus. Global economic activity has been impacted significantly. European countries and the US were among the most severely affected markets by the pandemic with unemployment rates hitting the highest levels in decades and economic data suffering deep contractions. While many markets are still struggling to recover from the economic fallouts, Asia has held up relatively well. China has shown expansion in manufacturing activities as well as improving retail sales, while Taiwan and Vietnam recorded strong growth. Furthermore, China’s economy grew by 2.3% in 2020, in contrast to other regions with negative growth for the year, such as the US (-3.5%) and Germany (-5%).

It is, however, important to note that growth rates vary among Asian countries. Markets such as India, the Philippines and Malaysia experienced a longer period of lockdown and hence are expected to see slower recovery. Weaker economic recovery will also weigh on the government’s budget. For instance, the IMF expects the combined fiscal shortfall of the Indian federal government will reach 12.1% of GDP in the year through March 2021, up from 7.9% in the previous financial year. Therefore, when investing in Asia, portfolios with diversified country allocations can provide protection while maintaining decent growth upside.

Real GDP growth projections

Tech Powerhouse

In recent years, Asia has become a fertile ground for technological development thanks to government support and an opening up of capital markets to foreign investment. China, Taiwan and South Korea have transformed their roles from manufacturers of global products to disruptive technology generators in the areas of 5G, digital payments, big data, blockchain, and others. Companies like Alibaba, Samsung, and Huawei* are world-class leaders in the technology space. Political leaders in the region have emphasized the importance of technological innovation, which are likely to be the key focuses for policies in the region in the near term. Companies in the technology sectors are likely to become the major beneficiaries of such government support.

Technology innovation has contributed to resilience and growth to the Asian stock market YTD. Capital market activity in Chinese tech remains strong despite market volatility - more US-listed Chinese tech firms are coming back to be listed in onshore China or offshore Hong Kong. In South Korea, tech has been one of the rare sectors where earnings have surprised to the upside. In Taiwan, the technology sector has been enjoying a surge in chip orders, which is well reflected in electronics exports growth in 2020. We believe there is a huge upside potential in the region as these areas continue to drive innovation. 

Indexed to MSCI

Attractive valuations with strong growth

The MSCI All Country World Index is currently 10.9% above the pre-pandemic peak in February 2020. Despite a short and sharp selloff in March, the stock market has been in a bull market year-to-date, barely reflecting the adverse macro environment. While the path to an economic recovery is still uncertain, many are worried that valuations are stretched, and stock markets are vulnerable. Investors are increasingly looking to diversify their positions to areas with fairer valuations and more promising growth. Currently, Asian indices offer some of the best valuations among major markets globally. The P/B ratio of the MSCI Asia Index is at 1.85x, near historical lows, and significantly below other key markets such as Australia (MSCI Australia at 2.2x) and US (MSCI US at 4.2x)3.

Despite low valuations, Asia is still a relative underweight for global investment portfolios as access to many Asian markets has been difficult for foreign investors historically. According to Broadridge’s mutual fund data, only 10% of the assets managed by global mutual funds are invested in APAC markets4, yet Asia represents ~25% of global equity market capitalization. This gap presents a long-term growth opportunity for the Asian markets and we expect flows into Asia will ramp up.

Attractive valuations with strong growth

Bottom Line

To conclude, Asia has coped relatively well with the Covid-19 crisis and is expected to achieve economic recovery faster than the rest of the world. Meanwhile, the region’s continuous efforts in driving innovation will help fuel growth in the future with valuations remaining compelling. Nonetheless, tensions building between the US and China remain a key risk when investing in Asia. The Covid-19 crisis has exacerbated tensions between the world’s two largest economies, bringing relations to their lowest point in decades. As US-China decoupling accelerates, investors may need to hold positions in both regions in order to capture growth upside whilst hedging their investments.