The beginning of this week saw President Trump arrive in Japan to begin an extensive tour of the East Asia region. Following Japan he will visit South Korea, China, Vietnam and the Philippines.
In addition to important bilateral meetings with leaders in all these countries the President will attend and address some powerful regional summits. These include, while in Vietnam, the Asia-Pacific Economic Cooperation (APEC) meetings, and in the Philippines the 50th anniversary celebrations of the Association of South East Asian Nations (ASEAN).
APEC is a forum for 21 Pacific Rim countries including all of those in East Asia like China, Japan and South Korea, plus Russia, India, Canada Australia, New Zealand and Chile. It is the most significant economic gathering of countries outside of a G20 or G7 meeting and that includes the EU. If G20 goes the way of G7 then it will start to focus more on non-economic and non-financial issues, which will leave APEC as the most significant forum to focus on economic and financial issues. That can only be a positive for this region.
Meanwhile, ASEAN is the ten economies of Southeast Asia comprising over 600 million people and is equivalent to an economy the size of the UK’s or France (depending upon currency moves), the fifth or sixth biggest in the world. It is focusing more on developing intra-regional trade ties, avoiding the political challenge of committing to a single currency and also avoiding free movement of people, although encouraging skilled labour to move if needed. This, too, should be positive.
A commitment to strengthening alliances
The aim of President Trump’s trip, according to the White House is to underscore the commitment to, “US alliances and partnerships” and to “reaffirm US leadership in promoting a free and open Indo-Pacific region.”
From an investment perspective this region is very important. In that context, so too is the President’s visit. We believe there is a strong case to hold an exposure to the Asian region.
We are optimistic about the longer-term outlook for the global economy. Asia plays a vital role in that, housing some of the biggest economies (China is second and Japan third largest) and some with huge populations (in addition to China, India and Indonesia stand out).
Half of the world’s middle income consumers now live in Asia. Their incomes are not as high as those in Western Europe or the US, but they are rising.
In terms of innovation and thus potential future growth, there are opportunities although it would be wrong to thing about this solely in terms of Asia. I prefer to think of these in terms of the Indo-Pacific region, stretching from the US through East Asia to India. Japan’s innovation in robotics, or South Korea’s huge ratio of investment, at over 30% of GDP, is indicative of this.
Thus the President’s commitment to a free and open region is crucial for global growth in the longer term. In recent decades Asia has bought into the US economic model, trading heavily with the US and embracing free markets. In return the US has been the effective policeman for the region, with its strong military presence, including troops based in Japan, South Korea and Singapore.
The growing importance of trade and economic issues
Of course, one of the first things that Trump did on becoming President was to withdraw from the planned trade deal with Asia, The Trans Pacific Partnership (TPP). The remaining 11 members of the TPP will be at the APEC meeting and may yet decide to proceed. Whatever they opt for, Trump’s agenda is more about bilateral trade deals across the region. Clearly the US remains a vital trade partner for all Asian countries, but so too does China and its regional economic importance continues to grow. Indeed, China’s commitment to the Belt Road initiative – the biggest infrastructure project in the world – will strengthen its regional ties. So, too, will the growing future importance of the Asian Infrastructure Investment Bank, led by China, for financing regional infrastructure plans.
Now the geopolitics of the region are changing, too. This is seen in terms of the immediate issue of North Korea, although the reality is that this is a concern for all. It is also seen in China’s rise – thus the focus on the summit between Trump and Chinese President Xi Jinping.
The risks attached to North Korea should neither be exaggerated nor underplayed. Financial markets have reacted to events in North Korea but the impact has not been sustained. The worry has often been about possible contagion from any escalation of the crisis there. Therefore, it is critical for investors and markets that the US and China are in agreement – as much as it is possible for them to be – on the likely course of action regarding North Korea. Meanwhile, the south and east China seas territorial disputes, suggests an ongoing political risk premium will need to be taken into account in looking at the region. Yet it is the economic potential that trumps these geopolitical issues.
Of course, there are also economic issues that need to be contended with in considering investments. These issues were highlighted at the annual meeting of the Asian Development Bank, which took place in May in Japan. This is the largest annual gathering of the financial community across the region and this year the topics for discussion included the perennial ones of how Asia can fund its necessary infrastructure spend and delivering sustainable development. In addition, the other economic challenges include the ageing populations of some key countries (namely Japan, South Korea and China) and avoiding the middle-income trap as more countries attempt to move from middle to high income.
On balance, there are more positives for investors
While it is essential to take into account both these geopolitical concerns and economic challenges, there are sufficient positives for investors to focus on.
The recovery in global growth is being reflected in stronger growth across the Asia region.
As global trade rebounds, one of the biggest beneficiaries is likely to be Asia. While the region is seeing domestic demand as a more crucial driver of growth it is also still heavily dependent upon exports.
Asia needs to deepen and broaden its financial markets, both to allow domestic savings to be translated into investment and to realise more resilient growth in domestic demand, allowing more firms to access capital markets. Local currency bond markets are developing across the region. Financial technology and global links are developing. Last week, in London, I attended a small lunch where the main guest was the head of HKEx, the Hong Kong Exchange, which not only owns the London Metals Exchange (LME) but which is developing capital market ties between China and outside. All of this is indicative of the rapid pace of financial development across East Asia and is another reason to keep a close eye on this region.
The message, though, is not to rush and not to try and pick winners. It is important to think long term and focus on the underlying economic and financial drivers.
Please remember that when investing your capital is at risk.