As the world economy emerges from the pandemic’s shadow, Asia looks set to dominate the next phase of globalisation

In June, an Indian software-testing platform closed a multi-million-dollar funding round that valued the company at a cool $4bn — one of more than two dozen “unicorn” start-ups that have emerged from the Indian subcontinent this year alone.

“Different countries in Asia have complementary strengths, and we are now starting to see those strengths come together”

For years, China has dominated talk of Asia’s growing presence on the world stage. But as the global economy recovers from the Covid-19 pandemic, the continuing rise of Asia in the 21st century is turning into a much wider phenomenon.

“The Asian century is becoming a fully-fledged regional story,” says Dong Chen, Executive Director and Senior Asia Economist at Pictet Wealth Management. “Different countries in Asia have complementary strengths, and we are now starting to see those strengths come together.”

Rise of the consumer

The economic transformation of a region that in 2000 accounted for just one-third of global gross domestic product in purchasing-power-parity terms is startling: according to management consulting firm McKinsey, Asia is on track to command as much as half the world’s GDP as early as 2040.

In a separate report, it predicted that Asian consumers will account for roughly half of the growth in global consumption over the next decade, in a market worth $10tn. Half of all upper-middle-income and above households are expected to be in Asia — and half of all global transactions will be made by consumers in Asia.

But what will drive this extraordinary growth as Asia dominates the next phase of globalisation? And which sectors are likely to be the most dynamic over the coming years?

Industrialisation gathers pace

Chen of Pictet says that one engine is the region’s continuing industrialisation, a process that over the last two decades has seen China turn into the world’s leading manufacturing hub.

“Because China has become more expensive, you are starting to see this relocation of supply chains for clothes, shoes, toys and electronic assembly towards south Asia and southeast Asia”

By 2018, China already accounted for 28 per cent of global manufacturing output — more than 10 percentage points ahead of the US. Manufacturing also contributed to almost 30 per cent of the country’s total economic output in 2018. While that is set to continue thanks to the sheer depth of China’s manufacturing ecosystem, industrialisation is gathering pace in several other Asian countries, in particular India, Thailand, Malaysia and Indonesia.

With labour costs in established manufacturing centres such as China increasing, countries with lower wages are stepping in to relieve some of the pressure.

“Because China has become more expensive, you are starting to see this relocation of supply chains for clothes, shoes, toys and electronic assembly towards south Asia and southeast Asia,” says Chen. “They are not always glamorous industries, but they bring employment and generate economic growth.” “Manufacturing in India is still less than 15 per cent of the country’s GDP, so there is still a long, long way to go,” he adds. Rapid urbanisation Another driver of Asia’s future growth is rapid urbanisation, which brings greater prosperity and economic growth through work that pays better than rural jobs in agriculture. That, in turn, helps expand and deepen the middle classes. Only 35 per cent of India’s 1.4bn people live in cities, for example, compared with more than 60 per cent in China. The same potential for growth exists in Vietnam and Indonesia, whose cities house just 37 per cent and 57 per cent of the population.

Pictet estimates these factors will contribute to average annual growth in Asia (excluding Japan) of 4.4 per cent between 2023 and 2031, compared with 2 per cent for the US and 1.7 per cent for Europe.

Sectors to watch

Evelyn Yeo, Head of Investments in Asia at Pictet Wealth Management, believes the most dynamic sectors over the coming years will be IT, consumer discretionary and healthcare.

“The pandemic has led many people to reflect on the importance of health and wellness Taiwan and South Korea already loom large in the semiconductor industry, and that is set to continue with future demand coming from the increasingly digital global economy, a new generation of digitally native workers and even the rise of remote working, which require more hardware.

Another related growth area is the hardware required for the green revolution: China is already the world’s leading producer of photovoltaic cells, electric vehicles (EVs) and battery storage for EVs and other electrically powered machines and devices. With scale and a deep manufacturing platform already on its side, China’s dominance in the sector will be hard to challenge.

In terms of consumer spending, Yeo believes that short-term demand will be driven by the post-Covid-19 reopening of trade and, longer term, by China’s determination to push through its “common prosperity” drive, which aims to narrow the country’s huge wealth gap and eliminate poverty. “It’s really all about the rise of the middle classes,” says Yeo. “And that will benefit the consumer-discretionary sectors in the years to come.”

Yeo says China’s ageing population will create huge demand for healthcare in the coming years and decades, while Covid-19 has also had a profound effect on people’s attitude to health. “The pandemic has led many people to reflect on the importance of health and wellness,” she says.

Lingering concerns

“Data transparency is a key thing. If we want to move towards carbon neutrality, this is something that companies need to adhere to.”

Still, questions remain as to the sustainability of Asia’s future growth. One of them centres on regulation and, in particular, the shifts in China’s policy towards business. The technology crackdown this year, which saw the government restrict many of the country’s biggest technology companies, is a case in point.

As investing along environmental, social and governance (ESG) lines moves to centre stage among international investors, another concern hinges on the extent to which Asian companies can make the transition to a low-carbon economy and the reliability of their ESG-related accounting.

Despite all those concerns, the region’s continued ascent appears all but assured. If the 20th century was about the rise of the US, the 21st century looks set to belong to Asia.