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Asia's growing importance in the global economy
ASIA'S economic footprint, in particular Emerging Asia's, has grown significantly. Asia's growth rate is also higher than other regions, accounting for about half of global growth last year.
The nature of growth in the region has also been changing. While exports to the rest of the world remain a key driver, Asian economies increasingly rely on domestic and regional sources of growth due to increased supply-chain, trade and financial market integration.
Additionally, Asia's equity, bond and foreign exchange markets have grown, notably in Emerging Asia. The share of the region's equity markets has doubled over the last 20 years to close to 40 per cent of global market capitalisation today. The development of local currency bond markets not only increased the scope of investible assets in the region, but also fostered stability by reducing the currency mismatch that was a problem for many Asian economies in the past.
The region has also learnt valuable lessons from the Asian Financial Crisis in the late 1990s. The result is more credible monetary and fiscal policies, improved financial sector regulation and supervision, and a shift from fixed or heavily managed currencies to more flexible exchange rates. Private and public sector balance sheets strengthened, national savings increased, and most Asian countries built up significant foreign exchange reserve buffers against external shocks.
WILL ASIA'S RISE CONTINUE?
While the region's future growth may be slower as economies mature and populations age, it will still in aggregate likely outpace that of developed and emerging economies outside of Asia. Three themes will underpin Asia's potential.
First, continued urbanisation and middle class growth in the emerging economies. Second, continued investments in infrastructure, human capital and education. Third, deeper regional integration, as well as the further opening up of its capital markets to foreign investors. Even though globalisation may progress more slowly going forward, together with regional integration, it is expected to support Asia's growth story over the longer term.
However, Asia has challenges to overcome before it can deliver its full potential.
One challenge is structural reforms, which must continue. Further liberalising trade and market access is critical to improving productivity and unlocking Asia's growth potential.
Asia is also vulnerable to geopolitical tensions, which are tail-risks that could disrupt Asia's growth story and security situation.
One manifestation of these tensions is the growing trade and business restrictions between the US and China. This will affect the whole of Asia, due to the high trade dependency and regional supply chain integration. Many countries will be worse off, losing the benefits from globalised markets and supply chains, and the sharing of knowledge, innovation and technology that enable countries to progress together. In such a scenario, however, our view is that China and the other Asian countries will still be able to develop and upgrade their domestic economies.
New technologies can help boost productivity and compensate for a shrinking labour force in some countries, but will also disrupt businesses and the job markets. For example in Emerging Asia, automation threatens the traditional "development route" of labour-intensive manufacturing.
Lastly, labour, natural resource and environmental constraints need to be overcome.
If Asia overcomes these challenges - and we believe the governments, businesses and people have the resolve and capabilities to do so - the region will remain economically vibrant and attractive for investors. This will cement the global economic and financial shift to Asia over the long term.
HOW DOES GIC INVEST IN ASIA?
High economic growth does not automatically mean higher investment returns. GIC targets companies and sectors that benefit from current or future drivers of the economy. As a long-term value investor, we look to buy the "growth story" before it is fully priced into valuations and stand ready to take advantage of potential market dislocations.
GIC has been an early and significant investor in Asia. Starting in Japan in the 1980s, and expanding to Emerging Asia from the 1990s, GIC grew the Asia portfolio given our belief that the region will benefit from sustained structural improvements and outperform in the long term. One way GIC gained exposure to Asia was indirectly through multinationals. In the earlier years, these were good vehicles to use given their better governance and liquidity. However, with the rising number of strong Asian-based businesses, increasingly we felt the need to gain direct exposures. Today, over 30 per cent of our portfolio is in Asia, more than most global institutional investors.
As a long-term investor, we have provided stable capital across the public and private markets in Asia through the cycles. Beyond our capital, we also add value by sharing our global expertise and relationships, and creating opportunities for our partners and investee companies in the region.
Asia presents attractive opportunities across consumption-based goods and services sectors, including financial services, healthcare, education and technology. Its growing global value proposition is fuelled by the continued rise of its middle class, infrastructure investments, regional integration and steady technological progress.
While Asia has challenges to overcome, GIC is confident that these can be addressed, especially with sustained structural reforms. As an early and steady investor in the region, we have learnt valuable lessons and will continue to strengthen our capabilities and partnerships. This will help us play a positive role in Asia's growth over the long term.
- The writer is chief executive officer of GIC