The author of this piece answers the headline question by concluding that it is "better to be well invested, rather than under-invested." The article explains the reasoning and why doubts have grown about China as a growth driver.

The following article discussing how investors should consider the Asia region – and possibly take China out of the mix – touches on how the world has changed in recent years. The article comes from editorial board member Grant Parkinson, head of consumer, private and business banking for Europe at Standard Chartered. The editors are pleased to share these thoughts, and of course welcome feedback. The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com

As the world’s fastest growing and most dynamic region, Asia now accounts for nearly half of global growth (1).  China has been one of the main drivers of this boom since opening up to foreign trade and investment, and reforming its economy in the late seventies. But with the great growth engine slowing, what next for investors who want to maintain asset allocations in Asia, but who are becoming increasingly cautious on China? 

China has experienced significant change in recent years. A pandemic, a faster-than-expected decline in the working-age population, corrections in the once red-hot property market, sluggish private investment, and geopolitical tensions, all of which have contributed to slowing growth. Standard Chartered has maintained its 2023 growth forecast of 5.4 per cent but, has revised its forecasts down for 2024/25 from 5.5/5.3 per cent to 4.8/4.5 per cent. Taking a longer view, we expect China’s potential growth to slow to 3 per cent by 2035. 

Against these forecasts, riding the Chinese dragon is clearly becoming more challenging for investors but, in our view, it hasn’t lost its fire.

Growth is still relatively strong compared with the rest of the world – the firm is forecasting year-on-year GDP growth of 1.4 per cent in the US, 0.4 per cent in the eurozone and 0.2 per cent in the UK. China’s markets also appear to offer value. However, investors should apply a degree of caution as questions remain as to the extent that GDP growth will feed through to earnings' growth for equities. 

While it is difficult to argue the case for a total withdrawal from China, what is becoming clear is that having a sole relationship with the country is becoming increasingly risky. This has led to growing investor demand for opportunities within Asia which exclude China. 

The concept of Asia ex Japan has been around for decades but, conversations are now shifting towards Asia ex Japan, ex China as investors consider reducing exposure to China while boosting holdings elsewhere in the region. The challenge is how to implement this approach. Currently, there are few products available – the only way is to rebuild asset allocations and invest on a country-by-country basis. However, the complexities of this tack make it difficult for even the most experienced discretionary portfolio management teams and it is not the way many clients want their assets managed.   

Foundation and opportunistic
Standard Chartered's approach is to reduce Asia and take pocket risk outside of that. So, investors still hold Asia ex Japan (which includes China) and then they overlay dedicated allocations in other markets in what the firm describes as a foundation and opportunistic approach. It is putting more product on the shelf to enable its clients to do this.  

The firm is also seeing growing numbers of investors seeking financial providers with local expertise in Asia and, therefore, the capabilities to meet their changing needs and expectations. Standard Chartered said that this plays to its strengths as one of the few international banks with a presence in some of the world’s most exciting emerging markets. Standard Chartered has been supporting clients in Asia for 170 years with investment colleagues in Singapore and teams with local knowledge in markets including Indonesia, India, Malaysia, and Vietnam. It said, that there is no substitute for being on the ground. 

Standard Chartered recently helped an ultra-high net worth family office in the Middle East, which wanted to restructure its holdings across geographies. Ensuring that the family had access to the best expertise for the different tranches of their overall asset allocation, including Asia, the bank went through a competitive process, listening to what the family was looking. However, the bank also provided a great deal of stimulus with respect to its views on the markets and how to structure the portfolio to capture long-term growth.

Through those conversations, it was able to support the family and diversify their investments geographically – moving them away from the US and Europe, and increasing their exposure in Asia, outside of China, and securing the long-term income streams they asked for.  

The next great growth engine 
One of beneficiaries of the shift away from China is India. Our view is that India will outperform in the long-term, while the International Monetary Fund predicts that India will be the third largest economy in the world by 2027 (2). 

Part of India’s appeal is its favourable demographics. The country already has one of the largest working-age populations in the world (those aged between 15 and 64). It is expected that this expanding middle-class will fuel domestic demand, in stark contrast with China (3) whose total population has peaked sooner than anticipated.  

Another beneficiary could to be Vietnam, albeit on a smaller scale. With a population of 100 million compared with India’s 1.4 billion, and a stock market in its infancy, it is a relative outsider in the race to attract capital flows.  

Away from equities, fixed income is compelling for those investors seeking stability in their portfolios. Asian credit is low volatility, 85 per cent investment grade and offering yields more than investment grade bonds elsewhere in the world, meaning that clients can achieve higher returns for the same level of risk. 

Standrard Chartered said there is no doubt that we are living in complicated times, but Asia has weathered many storms and has still emerged as the world’s fastest growing and most dynamic region. The firm believes that its role is to guide clients through the confusion. While China may not be the great growth story it once was, investors considering excluding it from their portfolios are risk missing out  – it is better to be well invested, rather than under-invested, it concluded. 

Footnotes

1, https://www.worldeconomics.com/Thoughts/The-Future-is-Asian.aspx#:~:text=Today%2C%20the%20Asian%20share%20of,remarkably%20short%20space%20of%20time.
2, https://www.imf.org/en/Publications/WEO/weo-database/2022/October
3, https://www.un.org/development/desa/pd/sites/www.un.org.development.desa.pd/files/undesa_pd_cpd57_egm_session_v-peng.pdf