Fidelity: New beginnings - rethinking portfolio allocations to Asia

Key points

• Asia offers valuable diversification and growth potential in the wake of recent macro and geopolitical shifts, with the region expected to drive 70% of global growth in 2023.
• Despite recalibrated expectations on China GDP, policymakers are seeking to boost activity in target areas. Elsewhere, the broader Asia region offers depth, breadth and attractive relative macro-fundamentals. 
• In practice, we see considerable nuance and dispersion across Asia. Deep bottom-up research - combined with local insight - is needed to identify key areas of opportunity. 

As investors consider their global portfolio allocations in a fresh light, given significant macroeconomic and geopolitical shifts this year, Asia broadly — even allowing for current China concerns — offers valuable diversification and growth potential, with the region forecast to contribute approximately 70% of global growth in 2023.

Asia is forecast to contribute around 70% of global growth in 2023

Projected share of global growth in 2023

Source: IMF, World Economic Outlook, April 2023.

Note: Groupings based on IMF Regional Economic Outlook classification.

Putting China in perspective

Despite recalibrated market expectations on China GDP growth and policy support, the credible case for investment in China continues to draw on:

• ample room for policymakers to extend targeted support — even if the pace and extent of this support seems uneven;
• selective fundamentals which are more resilient than broad macroeconomic indicators, coupled with attractive valuations; and
• significant innovation capability and industrial muscle at scale across many markets, including a 60-90% share of the global market across electric vehicle battery components.

While geopolitics cannot be ignored, we believe Sino-US trade dependency will continue to bring both parties to the table and set a tone of “de-risking” rather than “de-coupling”.

Depth and breadth across Asia more broadly

Asia is not China and broader Asia offers depth, breadth and attractive relative macro-fundamentals as 2023 has shown.

• Taiwan and South Korea, rather than China, have been at the forefront of Asian tech momentum.
• Parallels have been drawn between India’s current GDP and where China was in 2006.
• South East Asia continues to reap the benefits of “China-plus-one” supply chain reconfiguration, including Indonesia (global EV chain) and Thailand, Malaysia, Philippines and Vietnam (electronics manufacturing capabilities).
• More broadly, if China policy stimulus re-energises Chinese overseas consumption — in particular, leisure and tourism — many countries across Asia stand to benefit, alongside separate efforts to boost intra-region trade.

Fundamentals-based approach and on-the-ground presence key

Asian high-level fundamentals hold up well on a relative basis. Corporate issuer credit metrics remain broadly solid and equity valuations are attractive relative to developed markets. On sustainability, there is potential for significant structural growth in Asia across a range of themes, including better access to good health, energy transition and financial inclusion.

In practice, we see considerable nuance and dispersion both within domestic markets and across Asia. Key success factors to investing across the region therefore include: 

• deep, bottom-up, fundamentals-based research, with a strong focus on valuation that gets under the skin of generic news flow to understand the micro factors that drive individual security performance and
• patience, significant on-the-ground presence and developed local market and stakeholder relationships.

The risk in underweighting Asia

Not allocating to Asia or maintaining a significant underweight to Asia risks missing out on extremely valuable, nuanced diversification and opportunity at a time when diversification and growth are at a premium.

Important information

This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than in other more developed markets. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers. Due to the greater possibility of default, an investment in a corporate bond is generally less secure than an investment in government bonds.