Asia is the fastest-growing, most dynamic region in the world, currently representing one-third of global GDP and more than half of the world’s annual growth. Despite its size and undeniable global impact, institutional investors have often found the prospect of gaining investment exposure to Asia daunting. Uneven governance, risk, and compliance standards and a general lack of familiarity with the business terrain also pose barriers to investment. But in a challenging global investment landscape, Asia’s powerful growth engine presents an opportunity that is difficult to ignore.
Data represented beyond November 2011 are estimates only. Global middle class consumption is defined here as household consumption between USD 10 and USD 100 Purchasing Power Parity (PPP)/day.
Source: Organisation for Economic Co-operation and Development (OECD) 2011, Perspectives on Global Development 2012: Social Cohesion in a Shifting World; Data as of November 2011
Consider these striking statistics:
These facts are mere glimpses into a much larger story: Asia’s extraordinary pace of modernization and economic growth over the past 20 years. Rising personal wealth and consumption, combined with gradual economic liberalization and technology adoption, have transformed Asia’s markets. Today, Asia is the dominant engine of global economic growth.
In recent months, our conversations with institutional investors and consultants have suggested that the trend toward more strategic, dedicated allocations to Asia is gaining momentum. To explore this observation in more depth, we commissioned an independent study from Institutional Investor Research (“II Research”). To conduct the study, II Research surveyed more than 100 North American institutional investors and conducted in-depth interviews with a dozen more.
Their conclusion? Dedicated allocations to Asia are indeed poised to increase: more than one-third of investors responding to the survey (39%) say they’re likely to increase their allocation to Asia over the next 12 months. Over a three-year time horizon, that figure grows to 71 percent. Survey results also reveal a clear trend among investors toward a long-term, strategic approach to Asia. The number of respondents who predict that their investment objectives in Asia will become increasingly strategic over the next five years outnumber those who say their objectives will become increasingly tactical by a factor of more than three to one.
This growing interest in Asia is supported by investors’ recognition of Asia’s extraordinary growth prospects—89 percent of survey respondents agree that potential growth in Asia’s markets is too great for investors to ignore—and by recent reforms that signal positive, if gradual, transformation in the region’s regulatory and market landscape. Market access in Asia is also improving—a trend perhaps most clearly demonstrated today by the near-term prospect of including China A-shares in global benchmarks.
As a result of these powerful forces, institutions that have historically relied on emerging-markets indices to gain exposure to Asia are increasingly compelled to focus time, attention, and resources on the region. Over the 25 years since Matthews Asia was formed in 1991, Asia has grown from about 45 percent of the MSCI Emerging Markets Index (“MSCI EM”) to about 70 percent today, and is projected to grow further. As Asia’s global impact continues to grow, so does investors’ motivation to get Asian investment right.