29-Nov-23 Equities

Asia Pacific: regional diversification

With its diverse strengths, Asia remains a global growth driver in our view. It is worth taking a look at the entire region, not least as a potential counterweight to the dominance of U.S. equities.

Home bias is a well-known investment habit: People prefer to invest in their familiar home region. And, for international investors, the United States is a draw for another reason: It is the largest, most liquid and most ubiquitous capital market, and has been outperforming its international competitors for years, thanks mainly to the big tech stocks. If you deem their valuations too high and want to diversify your portfolio, you could take a look at Asia. We are talking of Asia broadly here, from India to Australia, including Japan. This broad approach is obviously not about focusing on individual, short-term trends. It is about strategic diversification as a counterweight to the U.S. and Europe. And short-term factors make it all the more desirable to think about Asia.

Diversified globalization makes Asia more self-sufficient

Regardless of whether you call it diversified globalization or friendshoring[1], global goods flows have been changing for some years now. Regionalization is on the rise. For example, trade between China and the U.S. is declining, while it is increasing within the Asian region. The Regional Comprehensive Economic Partnership (RCEP) trade agreement between Asia-Pacific nations which, even without India's participation, involves 2.2 billion people and 30% of global trade, could contribute to this growth in trade within the Asia-Pacific region in the future. Rising domestic consumption there is also a growth driver. After years of sharply rising incomes, Asia's emerging countries have developed a broad middle class with strong consumer spending power.

Asia’s shares have long underperformed the U.S.

Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 11/13/23
* Based on next twelve months P/E ratio

Growth is this region’s strength, whether through ongoing industrialization, as for example in China and Vietnam, and/or through population growth, as in India and the Association of Southeast Asian Nations (ASEAN) states. Indeed, the appeal of the region lies in the various strengths that it combines: whether it’s Australia's wealth of natural resources and western-style service sector; Japan's established and often world-leading industry; India's[2] demographics and up-and-coming companies in the tech and service sector; or China's continued growth, with leading positions in important sectors such as renewable energies. China is currently experiencing a period of weakness due to the real-estate crisis and ongoing disputes with the U.S., among other things. But the fact that many Western companies want to reduce their dependence on China often benefits China's emerging neighbors. In general, investors who do not feel comfortable in China’s capital market due to regulations and uncertainty may be able to participate in its size and growth via neighboring countries, particularly Japan and South Korea.

In the near term, the region has much to be said for it. The headwinds from rising U.S. interest rates and U.S. dollar appreciation are abating, and after a difficult year China should slowly regain its footing. Meanwhile, Japan is currently shining more than in years. Wages and inflation are at last rising again and companies are accelerating their restructuring. Finally, what speaks not only for Japan but for the entire region is that international investors are still significantly underweight and the valuation discount to the S&P 500 is close to its historic high.[3]

Find more themes here

29-Nov-23 Macro

Female Finance: the benefits of diversity

How and why we still need to do more to get more women into finance, encourage more women to invest and improve education about gender, diversity and finance.
29-Nov-23 Macro

Cryptocurrencies: the portfolio perspective

As a relatively young asset class, cryptocurrencies, in our view, could be a valuable portfolio addition in an uncertain (rather than just a risky) world
29-Nov-23 ESG

Electrification: The Innovator's Dilemma

Current plans for utilizing renewable energy as the most cost-effective solution to reduce greenhouse-gas emissions look set to shake up many established business models
29-Nov-23 Equities

India: Delivering on many promises

India’s structural strengths – demography and democracy – are well known. Business-friendly politics, a thriving service sector and geopolitics add to the positive picture.
29-Nov-23 ESG

Circular Economy: Squaring the circle

How moving towards a carbon-neutral and ecologically sustainable circular economy is not only natural but can also be profitable.
29-Nov-23 Fixed Income

Bonds – strong year ahead

After a historically long dry spell, 2024 could become a good year for bonds. A resurgence of inflation remains a risk, but the high carry provides some security cushion – especially for corporate bonds.
29-Nov-23 Equities

Quality: A guide for stock pickers

In theory, quality investing makes a lot of sense in an uncertain world. In practice, it takes a great deal of skill and effort.
29-Nov-23 Alternatives

Real estate – time to enter?

Higher yields have proven to be a formidable headwind for both residential and commercial properties, but fundamentals have generally been stalwart.
29-Nov-23 Artificial Intelligence

Investing in the age of Artificial Intelligence

How (not) to identify the long-term beneficiaries of artificial intelligence (AI) and other types of disruptive technologies.

1. Friendshoring refers to a corporate strategy in which production is relocated to diplomatically friendly or allied foreign locations

2. See also our separate report on India: 10 Themes | India: Delivering on many promises

3. Bloomberg Finance L.P. as of November 2023

CIO View