Significantly increased debt, elevated inflation and much higher interest rates have the potential to bring Western economies’ period of relative dominance to an end. At the same time, Asia stands out in terms of its importance to global growth, with several thematic drivers. These include its dominance of the tech value chain as well as the drive towards decarbonisation.

Paradigm shift in global interest rates

In the period that followed the global financial crisis in 2008, the very low interest rates that prevailed in major Western economies helped developed market equities outperform their Asian counterparts.  Companies in Western economies were able to borrow money cheaply and use leverage to fund shareholder returns. The sharp rise in inflation last year and subsequent unprecedented pace of monetary tightening brought an end to this latest profit cycle. With debt now much more expensive, developed market earnings are now under pressure and businesses are being pushed to deleverage and cut costs. 

Meanwhile elevated Western government debt levels mean that central banks, such as the US Federal Reserve and the European Central Bank, may now be more constrained in their ability to raise rates sufficiently enough to control inflation.

Asian markets more comfortably positioned

The risk situation in Asia at present looks considerably more benign, and this could support relative performance in the years ahead. Companies in Asia have generally been much more prudent about using leverage to boost returns. As a result, balance sheets are much less stretched and therefore less vulnerable to the new increased interest rate environment.

Similarly, ever since the Asian financial crisis, Asian governments have generally been much more careful about creating imbalances and taking on too much debt. While this does not make the region immune to wider concerns about the global financial system, it does suggest a degree of protection.

Asia’s importance for global growth

Asia’s increasing importance as a driver of global growth can’t be understated. According to abrdn’s Research Institute, by 2050 four of the top seven largest global economies will be Asian.(1)
Even over the near term, the IMF is projecting that over two-thirds of  global growth in 2023 will come from Asia. Within this (as shown below), the two standout contributors will be China and India, which together are forecast to account for over half of global growth in 2023(2) albeit China’s contribution will be exaggerated by the positive growth impact of its recent re-opening.

Source: IMF World Economic Outlook, April 2023; Grouping based on 

Many of the key-long term drivers of Asian growth, such as rising incomes and large populations have been well understood for some time. However, another element which we think is particularly relevant from the investment perspective, is the region’s importance for some of the widely acknowledged key thematic drivers of global growth. Two notable examples are the region’s increasing importance in the global technology value chain and the global drive for decarbonisation.

Asian centrality for global decarbonisation

One of the most important global themes both now and in coming decades, is the global drive towards decarbonisation. China, perhaps more than any country, is leading the way on this front, driven by its commitment to achieve carbon neutrality by 2060. In recent years, the country has greatly increased the share of renewably derived energy. Indeed, renewable sources of power, including  nuclear, exceeded 50% of China’s installed power capacity in Q1 of 2023, overtaking fossil fuel-based capacity for the first time in history.(3)

A notable consequence of China’s environmental drive has been its increasing importance, and in some cases dominance, in the production of essential infrastructure items that enable decarbonisation. For example, China already accounts for 80% of global solar silicone module production and 88% of global lithium-ion battery production.

Asia’s centrality in the global tech value chain

Probably the single most value-additive part of the global economy today is the technology sector, which is another area where Asia has really been emerging in recent years as a global leader. A lot of attention is often paid to the rise of China. However, while China is certainly an increasingly important player, other Asian countries also occupy critical positions in the global tech supply chain, with two of the most notable examples being South Korea and Taiwan.

Indeed, in semiconductor production, which is arguably the single most important part of the global technology value chain, Taiwan and South Korea have the biggest shares of global production capacity, followed by Japan and China.(4)

Putting everything together

With the world shifting to a ‘new normal’ paradigm of elevated inflation and higher interest rates, the credit standing of both countries and companies will gain added importance in coming years. In this respect, Asia looks relatively well positioned compared to other global regions. At the same time, Asia’s stronger long term growth outlook suggests its contribution to global growth will continue rising. Among the key factors supporting Asian growth in coming years will be the region’s centrality in the global technology value chain and as an enabler of the  global drive for decarbonisation.

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