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QD view – Emerging Asia, much more than India and China

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Increasingly, investing in Asia has become a story of India and China. These twin behemoths account for over half of the MSCI Asia ex Japan index[1] and define the narrative for the region. However, some of Asia’s most interesting growth ideas – including China plus one, financial inclusion, and rising technology innovation – can be found away from these giant economies.

Benefiting from supply chain diversification

The ‘China plus one’ phenomenon, whereby multi-nationals seek to diversify their supply chains away from China, has become an important structural trend in the region. James Thom, manager of abrdn New Dawn, says: “We’ve seen multinational companies moving their supply chains into other parts of the region, alongside China. We see this as a new structural growth story across Asia, as important as other structural growth stories, such as urbanisation or digitalisation.”

Although India has sought to capitalise on this trend, the beneficiaries are more often found in the region’s smaller markets, particularly in South East Asia, where foreign direct investment is picking up. Thom adds: “Vietnam absolutely is a beneficiary and has been for a long time. A lot of manufacturing has set up there already and more is coming…. Malaysia and Bangladesh are also benefiting.”

This gives some of these smaller markets a compelling growth trajectory, but without much of the geopolitical baggage of China. Vietnam has sustained steady GDP growth of 6-7% in recent years, grew 8% in 2022, and is projected to grow 5.8% and 6.9% in 2023 and 2024 respectively[2]. Malaysia, Bangladesh and Indonesia had growth rates of 8.7%, 7.1% and 5.3% in 2022.

Vietnam – building a renewable energy hub

Vietnam in particular has shown itself adept at offering an alternative, politically neutral manufacturing hub to China, while slowly building its expertise in areas such as renewable energy. Craig Martin, manager of the Vietnam Holding trust, says that the country has ambitions to become a regional renewable energy hub powering up much of Asia. He points out that Vietnam now has the same level of urbanisation and GDP per capita as China 20 years ago and is following a similar trajectory. This would give it an astonishing runway of growth ahead.

He says: “At the moment, the Vietnamese are brilliant at making stuff, with strength in maths and technology, and plenty of enthusiasm and optimism. Certainly, they will need to improve the rule of law, sort out corruption, and build out their infrastructure, but there is strong growth there.”

South Korea – improving governance and technological prowess

There are also idiosyncratic trends emerging from Asia’s more mature markets. The managers of the Weiss Korea Opportunity Fund, for example, point out that South Korea’s improving governance trends should provide a tailwind for stock market growth over the next few years. Equally, the country is building a reputation as a home for technological prowess and innovation, through companies such as Samsung Electronics, LG Electronics and SK Hynix. These companies are a key part of the value chain in some of the world’s fastest-growing industries, such as electric vehicles, 5G technology and smartphones.

Opportunities in overlooked, less-efficient markets

These smaller Asian markets tend to trade more cheaply than the largest markets in the region, particularly India. They are often overlooked by investors in the region, who choose to focus their analytical resources on the largest markets. Thom says South East Asian markets in particular have been out of favour for a long time and valuations now appear increasingly attractive. Investors may also have been deterred by volatility (Vietnam) or weak governance (Korea), but in general these are problems that are improving over time.

The problem, as Thom points out, is that strong macroeconomic forces and low valuations do not necessarily translate into share price performance. He admits that he struggles to find companies that fit abrdn’s quality criteria and have sufficient liquidity within these smaller markets. While he can hold ‘frontier’ economies such as Bangladesh or Sri Lanka, he has limited holdings there. “Asian companies often have a single, large dominant shareholder, so free float is also relevant”.

This has been a perennial problem with Vietnam as well. While liquidity is improving – it is around 4x higher than in 2020 – companies still have foreign ownership restrictions. Equally, says Martin, its stock market is 90% owned by retail investors, which creates volatility. These problems are less in evidence in the mature markets of Singapore, Korea or Taiwan.

Asian smaller companies require a targeted approach

If investors are convinced of the growth prospects for companies in these smaller economies, they will need to be targeted in their approach. In general, the large diversified trusts won’t give a lot of exposure to these countries. Thom’s abrdn New Dawn has holdings in the Philippines, Vietnam, Indonesia and Singapore, but still only has around one-third of its holdings outside China/Hong Kong, India and Australia.

Its stablemate, abrdn Asia Focus, is more focused on these smaller markets, with around 70% of its holdings outside China/Hong Kong and India, including 10% in Indonesia, 5% in Vietnam and 6% in Thailand. Although the mandate recently changed to raise the size cap for companies in the portfolio – allowing the introduction of Chinese smaller companies – manager Gabriel Sacks still finds more opportunities elsewhere. He believes these markets give investors access to domestic growth in Asia, rather than the large multi-nationals that dominate the Indian and Chinese markets.

Concentrated exposure through, for example, a dedicated Vietnam fund, is often boom or bust. Vietnam Holding, for example, is up 70% over three years, but down 17% over one year. It is an exciting ride, but may not be to everyone’s tastes. The Weiss Korea fund is up 26.3% over three years and down 11.8% over one year.

Despite their limitations, Asia’s smaller markets offer access to key structural trends across Asia, and may side-step some of the geopolitical issues associated with the region’s larger markets. They are growing in economic power and influence and could represent an important growth option for the future.



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