Investment Outlook: over the next decade, Asian equities are likely to deliver higher average returns as compared to developed market equities.
There is little doubt that Asia Pacific has been a key global growth driver in the last 14 years. This point is backed by data that shows Asia Pacific’s increasing share of global GDP with North America and Europe witnessing decline in share of global GDP during the period 2000-2014.
As the chart below shows, the share of global GDP generated by Asia and Pacific region has increased to 40.7% in 2014, representing an increase of nearly 11% during this 14 year period.
During the same period, North America’s share of global GDP has declined by 6% points to 20.2% and Europe’s share of global GDP has declined by 4.5% points to 23.4%.
I must mention that one of the key forces driving increasing share of global GDP for Asia has been China. However, over the next decade, China’s GDP growth is likely to be significantly lower. I still believe that Asia Pacific’s share of global GDP will continue to increase because of the following two factors –
First, even if China grows at 4% over the next decade, average GDP growth for China is likely to be higher than average GDP growth for Europe and North America. At best, advanced economies might grow at 2% over the next decade.
Second, China is home to 1.3 billion people and the per capita GDP has increased significantly in the last 2-3 decades. India is home to 1.2 billion people and there is huge impending growth if policies move in the right direction.
Overall, I believe that with gradual increase in per capita GDP in Asia, living standards will also trend higher. On the other hand, living standards are likely to stagnate or decline (for few countries) in North America and Europe.
From an investment perspective, global diversification is important and I believe that US investors need to have meaningful exposure to Asian equities. In line with GDP growth expectations, I believe that Asian equities will provide higher average returns in the next decade as compared to advanced market equities.
However, with China in renewed downturn, I believe that there is more pain for Asian stocks in the near-term.