Instead of concentrating most of their production bases in China, corporations are branching out to other markets – either closer to their end customers or to ones with friendlier relations with their countries of origin.

Two relatively recent shocks are driving this shift in global supply chains:

• The COVID pandemic led to abrupt border closures, acute supply shortages, and shipping gridlock, resulting in rising input prices and inflation.
• Trade tensions between the US and China and Russia’s subsequent invasion of Ukraine forced corporations to reassess their exposure to geopolitical instability.

Asia’s structural reforms

What does this mean for Asia? For a start, there is an ongoing race between Asian governments to implement structural reforms that reduce the constraints of doing business in their countries to attract more foreign direct investments. For example, Indonesia has the potential to become a major industrial hub due to its vast natural resources. India, which benefits from favorable demographic trends, is already a global hub for IT services. Vietnam is an urbanizing country with a thriving export market, and it has undertaken strategic infrastructure development since the 1990s to become a manufacturing hub like China.

This creates a tremendous flow of investment opportunities across Asia ex-China and emerging markets ex-China. Our regional portfolios are positioned to take advantage by investing in companies poised to benefit from long-term structural tailwinds emerging from this trend. There are three areas around this trend where we see the most attractive opportunities:

ASEAN’s growing importance

ASEAN (the ten-nation Association of Southeast Asian Nations) is an attractive destination for Western and East Asian multinationals as a low-cost alternative manufacturing base to China.

The region has an attractive demographic dividend – some 685 million people and a combined projected growth of around 4.6% GDP annually for the rest of the decade. Moreover, though China’s labor costs are relatively cheaper than the West, direct manufacturing costs in Indonesia, Thailand, and Malaysia are between 10% and 15% lower than in China. Further, Southeast Asia has a range of well-established manufacturing clusters, including electronics in Malaysia and Vietnam, automobiles and packaged food in Thailand, machinery and petrochemicals in Indonesia, and semiconductors, biopharmaceuticals, and aerospace components in Singapore.

We are already seeing the first wave of opportunities in ASEAN coming through, with industrial land players benefitting.

India’s manufacturing ambitions

The Indian government has stepped up initiatives to turn the country into a global manufacturing hub, with campaigns like "Make in India" and production-linked incentive schemes designed to spur companies to shift their production bases to India.

This is in addition to offering favorable tax rates, an easier land acquisition process, and building up domestic infrastructure. As a result, we are seeing an inflection in India's capital expenditure and infrastructure cycle, underpinned by government spending on roads, railways, airports, and everything in between.

Increased resilience within the tech sector

In a bid to diversify the global supply chain, leading Asian tech players are investing in new manufacturing bases outside Asia to keep pace with the expected increased demand for computing power. A sizeable portion of their new hubs are being created in developed markets. While such moves make the supply chain more resilient to disruptions, there is also a growing opportunity to invest in the ancillary parts of the overall tech value chain.

Final thoughts

All of this is not to say that China no longer holds any promise. Quite the contrary as we are finding attractive bottom-up opportunities in both the onshore, or A-shares, universe that are tied to the country’s structural tailwinds and in the offshore space (H-shares). In many sectors, Chinese companies are becoming globally competitive.

Many corporations have also become cash flow generative and pay attractive dividends, offering income and growth for some of our portfolios. We remain constructive on China and maintain an active pipeline of ideas in the country for our regional portfolios. Further, we are prepared to add to high-quality stocks that, in our view, have been sold indiscriminately alongside the broader market, where we see good quality coupled with strong financials.

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed, and actual events or results may differ materially.

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

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