Russell Beattie, CME Group
AT A GLANCE:
- As the developed world faces a slowdown, emerging Asian economies are expected to grow at twice the rate of the United States in 2022
- Countries like India, Vietnam and the Philippines enjoy a growing middle class, ongoing urbanization, and a high level of technology adoption
As much of the world faces a sharp slowdown in growth, emerging markets in Asia remain a bright spot on the investment horizon. Emerging Asia, which includes China, India, Indonesia, the Philippines, Thailand and Vietnam, has outperformed other emerging markets during the past two decades. Going forward, it is forecast to have higher GDP growth than advanced economies in the next two years. But while these countries offer significant investment opportunities, they are not without risks.
A Strong Track Record
Emerging Asia markets have put in a strong performance in recent years. In the five years leading up to the pandemic, Vietnam enjoyed average annual economic growth of 7%, while in China GDP growth averaged 6.9% a year during the same period, and in India and the Philippines growth averaged 6.7% and 6.5% respectively, according to World Bank data. Although emerging Asia economies suffered a sharp contraction during the pandemic, they have gone on to stage strong recoveries. GDP growth in India rebounded to 8.9% in 2021, while China posted GDP growth of 8.1%, and in the Philippines, it recovered to 5.7%. Across emerging Asia as a whole, GDP growth averaged 7.3% in 2021.
Investment Opportunities in Emerging Asia
Solid growth in emerging markets in Asia is expected to continue going forward, according to the International Monetary Fund. In its latest economic forecast, the IMF has penciled in annual GDP growth of 4.6% for emerging and developing Asia in 2022, rising to 5% in 2023. By contrast, it is predicting more subdued growth of just 2.3% and 1% in the United States, and 2.6% and 1.2% in the Euro Area in 2022 and 2023 respectively.
With the exception of China, emerging Asia countries have positive demographic trends, with young populations making them well-placed to reap the so-called “demographic dividend”. Meanwhile, the countries enjoy a growing middle class, with its associated rising demand for goods and services, ongoing urbanization, and a high level of technology adoption.
Vietnam is expected to see the strongest performance this year, with the World Bank forecasting GDP growth of 7.5% for the country in 2022, as its manufacturing and services sectors continue to recover from the COVID-19 pandemic, and it benefits from growing consumer demand and rising tourist numbers. The Philippines is also expected to enjoy strong domestic demand, as well as increased private investment and large public infrastructure projects, contributing to forecast GDP growth of 6.5% for this year, according to the Asian Development Bank. Meanwhile Malaysia and Indonesia look set to benefit from a combination of increased domestic demand, recovering tourism and strong raw material exports. Both countries also stand to gain from increased commodity prices.
Emerging Market Challenges
Despite these upbeat forecasts, emerging Asia markets are not without risks, and neither are they immune to the impact of external factors. One of the biggest challenges emerging Asia currently faces is slowing global growth, which could negatively impact demand in its export markets. Meanwhile supply chain issues remain, as the disruption caused by the COVID-19 pandemic continues to work through the system, hindering countries’ ability to get their goods to market. Emerging Asia economies also must contend with commodity price volatility. Although a number of countries in the region are currently benefiting from high commodity prices triggered by the conflict in Ukraine, if prices remain elevated, they are likely to translate into rising inflation, which could hurt domestic consumption.
Emerging Asia is also not immune to the impact of tightening monetary policy in advanced economies. As the U.S. Federal Reserve aggressively hikes interest rates to combat high inflation, currencies in emerging Asia markets have weakened against the U.S. dollar. While weaker currencies may make exports cheaper, they could further stoke domestic inflation, hurting consumer demand, one of the key drivers of growth in emerging Asia. At the same time, the declining value of their own currencies makes foreign currency debt more expensive to service, creating further headwinds for their economic recovery. From an investor point of view, weakening currencies also increase the foreign exchange risk of investing in emerging Asia economies.
Meanwhile, the outlook for China is weaker than for other emerging Asia countries, as its economy comes under pressure from its ongoing zero-Covid strategy, issues in its real estate sector, and weaker global trade. The World Bank has penciled in GDP growth of 4.3% for China in 2022, just over half 2021’s figure of 8.1%. The slowdown in China could have a significant knock-on effect on other emerging Asia countries that count the world’s second largest economy as a significant export destination, particularly India, Vietnam, Malaysia and Thailand.
Creating a diversified portfolio helps investors tap into the opportunities emerging Asia markets offer, while also mitigating risk. Futures and options can be an effective way of hedging against risks, such as currency fluctuations. CME Group offers a range of FX products covering Asia emerging market currencies, including the Renminbi and Indian Rupee. Investors can also gain exposure to companies in emerging Asia through our equity index futures contracts, such as our E-mini FTSE Emerging Index Futures and E-mini FTSE China 50 Index Futures, which offer greater leverage, lower costs and round-the-clock trading.
While heightened inflation, tightening monetary policy and increasing risk of recession threaten more developed countries, emerging Asian economies could still be some of the few places to find opportunities. They are not without risk, however, and market participants should keep a close eye on how war, supply chains and rising commodity prices could create ripple effects for these areas in the long term.