Scott Kingsley, Senior Wealth Advisor
Thankfully, there are a few bright spots for the global economy amid uncertainty regarding interest rates and inflation. While many economies experienced a rebound in 2022, the prospects for 2023 and 2024 are mixed, to say the least. However, a recent report by the IMF suggests it may be time to revisit investor exposure to emerging/developing markets in Asia.
When looking at the forecasts for emerging/developing Asian markets, it is essential to put this into context. Even though the UK is forecast to register minimal growth in the next couple of years, the situation is not quite as bad globally. Set against growth of 3.4% in 2022, forecasts for the next couple of years are as follows:-
At first glance, there are reasons to be positive in the short term, but the IMF also issued a plausible alternative economic scenario. Further stress in the financial sector could reduce global economic growth to 2.5% in 2023, which would throw the forecast for 2024 into doubt. However, the IMF report also included an interesting comparison between advanced and emerging/developing economies, focusing on different areas of the world.
Historically, when advanced economies have struggled, this has often put even greater pressure on emerging/developing economies. However, according to the IMF economic summary, this trend could be reversed. We know that advanced economies, on average, grew by 2.7% in 2022 against 4% for emerging/developing economies. The forecast for the next two years is as follows:-
While emerging/developing economies are spread across the globe, there is a relatively high number in the APAC region, particularly Southeast Asia. On a broader basis, the APAC economies already account for circa 37% of global GDP. This figure is expected to increase to 42% by 2040, with emerging/developing economies in the region expected to play a prominent role.
Even though inflation is still stubbornly high in many areas, it is set to weaken over the next two years but perhaps more gradually than governments had hoped. Set to fall from 8.7% in 2022 to an average of 7% in 2023, a return to central bank inflation targets will likely be delayed until 2025. During this time, inflation will significantly impact household incomes and likely lead to an increase in debt levels. Against this backdrop, the forecast performance of emerging/developing Asian economies is even more impressive.
Before we look at individual countries in detail, emerging/developing Asian economies are also outperforming the global average for this type of economy:-
Many economists have highlighted the significant growth in the Far East internal trading market. However, while China dominates, we have also seen considerable strength in other emerging/developing markets.
While the broader figures indicate relative strength in APAC economies compared to the rest of the world, we will now look at advanced, emerging and developing Asian economies.
The IMF report uses a clearly defined selection of advanced Asian economies to break down different areas of the world further.
On a purely statistical basis, with no weighted average, this equates to average expected growth of 1.8% in 2023 and 1.96% in 2024.
In line with the global trend, you will not be surprised to see the following forecasts when comparing emerging and advanced economies.
While the figures may suggest otherwise at first glance, average economic growth is 5.1% in 2023, rising only slightly to 5.25% in 2024. However, a fall in Chinese economic growth and a flat Malaysian economy has dragged down the average figure for 2024.
With strong emerging economies, you might expect further improvement in frontier/developing economies. However, as you will see from the figures below, using IMF forecasts, this is not necessarily the case.
Before we look at the average for the above forecasts, it is crucial to recognise the ongoing challenges faced by the Sri Lankan economy amid an IMF bailout. There will be short-term pain as the government and the IMF look to get the Sri Lankan economy back on a more sound footing.
The average growth in this subsector of economies is forecast at 3.4% in 2023 and 4.5% in 2024. If we strip out Sri Lankan, the respective figures are 4.5% and 5.0%.
Taking a top-down approach, asset allocation is crucial to the long-term performance of your investments. As the APAC region is expected to account for 42% of GDP by 2040, revisiting your asset allocation strategy may be sensible. Even though emerging/developing economies are expected to outperform advanced economies in the region, it is still essential to take a balanced approach and not “put all of your eggs into one basket”.
There are two main ways in which you can invest in a region:-
Rather than investing in a relatively small number of companies, significant mutual funds and ETFs allow investors to benefit from a broad range of investments. Consequently, well-managed mutual funds/ETFs should move in line with the underlying markets. This negates any negative impact, or greater risk, associated with investing in individual companies or a small group of shares. There are many specialist mutual funds and ETFs offering general and specific exposure to the Far East.
Directly investing in one or a few companies enhances the risk compared to more diverse mutual funds/ETFs. It may also prove difficult to gain exposure to all of the forecast growth markets in the region from just a handful of individual companies. Those with a higher risk profile may prefer to utilise advisory/discretionary management services or do their own research if they have the time and skills.
In the short term, emerging and developing economies in the Asia region appear set to outperform more advanced economies. Investing in mutual funds or direct investment into individual companies can tap into this growth. However, balancing the risk/reward ratio against your investment strategy can be challenging. Consequently, it is vital to take professional financial advice to maintain a balanced, diverse approach to your portfolio.
If you’d like to know more about this article, or how you can invest wisely to guarantee a better future for yourself and your loved ones, get in touch today. It costs nothing to have a conversation, and it could be one that changes your life.