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 decarbonization.
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 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 International Monetary Fund 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 albeit China's contribution will be exaggerated by the positive growth impact of its recent re-opening.2
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 decarbonization.
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.
- abrdn Research Institute, May 2023
- IMF World Economic Outlook, April 2023; Grouping based on IMF classifications; https://www.imf.org/en/Blogs/Articles/2023/05/01/asia-poised-to-drive-global-economic-growth-boosted-by-chinas-reopening
- Centre for Research on Energy and Clean Air; https://edition.cnn.com/2023/05/12/economy/china-carbon-emissions-record-intl-hnk/index.html
- S&P Global, January 2023