Investors usually only focus on the U.S. and Europe and often forget about exciting and promising markets outside. This is a classic case of home bias, which is the reason why investors tend to invest in domestic markets. The Asian market is promising, not only for diversification.
Asia in transition
Although Asia is often forgotten by investors from the West, the continent is now home to over 4.5 billion people, almost 60% of the world's population. Asians therefore represent a gigantic target group for companies in the future, with unimaginably strong purchasing power. The UN Population Division estimates that the population in Asia will rise to 5.3 billion by the end of the 2050s.
The U.S. and Europe, which are usually the focus of investors, have only 1.1 billion people.
Asia's economy has grown strongly in recent years: Structural reforms, rising purchasing power, innovations and an ever-improving infrastructure have led to Asia's (excluding Japan) share of world GDP almost doubling from 21% to 38% in the last two decades. In the next 20 years, it is estimated to rise to over 50% and Asia will thus have an ever greater influence on the global economy.
Increasing urbanization will also be a strong growth factor in the coming years, as urbanization is growing rapidly, especially in the emerging markets in the Asian region. In Asia, only 46% of people currently live in cities, compared with an urbanization rate of 74.7% in the European Union. Residents in cities tend to have higher demand for infrastructure, real estate, consumer goods and technologies. City dwellers also have, on average, higher levels of education and higher skilled and more productive occupations, leading to a rapidly growing middle class.
Also, more and more people in Asia will have money to spare for investment, and since people are often subject to home bias, money is expected to flow increasingly into Asian assets.
Technologies are a strong growth driver in Asia; nearly 65% of the world's industrial robots are in use in Asia.
China, in particular, is a pioneer in robotics and AI, as it has been the largest market for industrial robots since 2013 and has the second largest number of AI companies after the US.
Additionally, China sells the most electric vehicles annually to combat smog in major cities. NIO, BYD and Co. are thus also preying on one of Germany's most important industries.
Internet penetration rates are also increasing rapidly in Asia, so that the percentage of people with Internet access has more than doubled to over 55% in the last decade. This offers more and more opportunities for Internet companies.
Higher opportunities, higher risks
Asia's stronger growth also brings higher volatility and other risks. In particular, geopolitical issues, such as the U.S.-China trade dispute, often lead to greater volatility in equity markets.
Also, Asian stock markets are less regulated and especially the government in China poses some risk. Close scrutiny of company figures is not feasible there, and also the state wields a great deal of power. The industry is dependent on subsidies from the state and curious events often occur, such as the recent disappearance of Alibaba founder Jack Ma.
The Vanguard ETF has nearly 400 companies from developed countries in Asia Pacific physically replicating in its portfolio. The fund has a total expense ratio of just 0.15% and distributes quarterly. In particular, Australia is heavily weighted at 40%, Korea at 31% and Hong Kong at 19%. Almost all industries are represented, with the financial sector and technology making up a large portion. Largest holdings are Samsung (11%), Asian insurer AIA Group (4.5%) and the Commonwealth Bank of Australia (3.5%).
The iShares ETF physically replicates the MSCI EM Asia Index to invest in companies in emerging Asia. The ETF has a total expense ratio of 0.65% and is accumulating. China has a very large weighting of over 42% and the ETF is mostly invested in IT, consumer cyclicals and the financial sector. Largest positions are Taiwan Semiconductor Manufacturing (7%), Alibaba Group (7%) and Tencent Holdings (6.7%).