While much of the world is experiencing a sharp slowdown in growth, Asia’s emerging markets remain a bright spot on the investment horizon. During the last two decades, emerging Asia, which includes China, India, Indonesia, the Philippines, Thailand, and Vietnam, has outperformed other emerging markets. In the coming two years, it is expected to have higher GDP growth than advanced economies. However, while these countries provide excellent investment opportunities, they are not without risk.
A Proven Track Record
Emerging Asian markets have outperformed in recent years. According to World Bank data, Vietnam experienced 7% annual economic growth in the five years preceding the pandemic, while China experienced 6.9% annual growth and India and the Philippines experienced 6.7% and 6.5% growth, respectively. Despite experiencing a sharp contraction during the pandemic, emerging Asian economies have recovered strongly. GDP growth in India recovered to 8.9% in 2021, while China recorded 8.1% growth and the Philippines recovered to 5.7%. GDP growth in emerging Asia will average 7.3% in 2021.
Emerging Asia Investment Opportunities
According to the International Monetary Fund, solid growth in Asia’s emerging markets is expected to continue. In its most recent economic forecast, the IMF projects 4.6% annual GDP growth in emerging and developing Asia in 2022, rising to 5% in 2023. In contrast, it forecasts more subdued growth of 2.3% and 1% in the US, and 2.6% and 1.2% in the Eurozone in 2022 and 2023, respectively.
With the exception of China, emerging Asia countries have positive demographic trends and young populations, positioning them to benefit from the so-called “demographic dividend.” Meanwhile, the countries benefit from a growing middle class, rising demand for goods and services, ongoing urbanisation, and a high level of technological adoption.
Vietnam is expected to have the best year this year, with the World Bank forecasting 7.5% GDP growth in 2022, as its manufacturing and services sectors continue to recover from the COVID-19 pandemic, and it benefits from rising consumer demand and tourist numbers. According to the Asian Development Bank, the Philippines is also expected to benefit from strong domestic demand, increased private investment, and large public infrastructure projects, all of which will contribute to GDP growth of 6.5% this year. Meanwhile, Malaysia and Indonesia appear to be benefiting from a combination of increased domestic demand, recovering tourism, and robust raw material exports. Both countries stand to benefit from rising commodity prices.
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Emerging Market Difficulties
Despite these optimistic projections, emerging Asian markets are not without risks, nor are they immune to the effects of external factors. One of the most significant challenges that emerging Asia is currently facing is slowing global growth, which may have a negative impact on demand in its export markets. Meanwhile, supply chain issues persist as the COVID-19 pandemic continues to disrupt the system, impeding countries’ ability to get their goods to market. Commodity price volatility is also a problem for emerging Asian economies. Although a number of countries in the region are currently benefiting from high commodity prices caused by the Ukraine conflict, if prices remain high, they are likely to translate into rising inflation, which may harm domestic consumption.
The impact of tightening monetary policy in advanced economies is also felt in emerging Asia. As the Federal Reserve of the United States aggressively raises interest rates to combat high inflation, emerging Asian currencies have weakened against the US dollar. While weaker currencies may reduce the cost of exports, they may also increase domestic inflation, reducing consumer demand, which is a key driver of growth in emerging Asia. At the same time, the falling value of their own currencies makes servicing foreign currency debt more expensive, creating additional headwinds for their economic recovery. From the perspective of an investor, weakening currencies increase the foreign exchange risk of investing in emerging Asia economies.
Meanwhile, China’s outlook is weaker than that of other emerging Asia countries, as its economy is under pressure from its ongoing zero-Covid strategy, real estate issues, and weaker global trade. According to the World Bank, China’s GDP growth rate in 2022 will be 4.3%, slightly higher than the 8.1% recorded in 2021. The slowing of China’s economy could have a significant impact on other emerging Asian countries that rely on the world’s second largest economy as a major export destination, particularly India, Vietnam, Malaysia, and Thailand.
Risk Administration
Creating a diversified portfolio allows investors to capitalise on the opportunities offered by emerging Asia markets while also mitigating risk. Futures and options can be a good way to hedge against risks like currency fluctuations. CME Group provides a variety of FX products that cover Asia’s emerging market currencies, such as the Rimini and Indian Rupee. Investors can also gain exposure to emerging Asian companies through our equity index futures contracts, such as the E-mini FTSE Emerging Index Futures and E-mini FTSE China 50 Index Futures, which provide greater leverage, lower costs, and round-the-clock trading.
While more developed countries face higher inflation, tighter monetary policy, and an increasing risk of recession, emerging Asian economies may be one 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 may have long-term ramifications for these areas.
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Conclusion :
Overall, the rise of Asian emerging markets has been a significant economic development over the last few decades. While these countries face significant challenges, such as income inequality, environmental degradation, and political instability, the overall trend is towards greater economic prosperity and influence on the global stage.
