Asia: the making of a global innovation hub

Our first office was set up in Asia in 1992. From humble beginnings with one member of staff working out of a small Singapore shophouse, today we have 105 investment professionals operating across nine markets in Asia Pacific.1 This evolution extends to our investment process and the lessons we’ve learned about the businesses and markets in which we invest. Our growing range of sustainable investment solutions represent the latest innovations in our unfolding journey

By Hugh Young

So, what have we learned in the past three decades?

A region transformed The pace of Asia’s development into an economic powerhouse continues to astound. By 2040, the region is forecast to account for 40% of global consumption and 52% of global GDP. Within 10 years, it’s estimated that 60% of the world’s middle classes will live in Asia. Already the region has more than half (2.3 billion) of the world’s internet users.2 The list of Asian milestones just keeps on coming.

Asia’s resilience Investing in Asia’s fast-growing markets has been nothing short of stimulating over the past three decades. We’ve been active through the 1997-98 Asian financial crisis, the ‘dotcom’ boom-and-bust from the late 1990s, the 2003 SARS outbreak, the 2008-2009 financial crisis and the large-scale quantitative easing and the COVID-19 pandemic. Asian markets have endured. Many emerged stronger. The Asian crisis and the capital discipline it imposed on governments and corporates laid the foundation for subsequent growth. The 2008 crisis had a limited impact on Asia.

These market upheavals have served to underline the value of our quality-focused investment approach. We have long maintained a preference for companies with healthy balance sheets, sound debt ratios and good earnings potential, allied to experienced and capable management teams. Crises only accentuate these virtues.

They also underscore the benefits of having a local presence to provide first-hand insights. We have learned to appreciate the political, economic and cultural individuality of each Asian market. By engaging companies, we’ve fostered deep and longlasting relationships across the region. This trust has proved invaluable during market sell-offs. It has given us the confidence to hold on to certain stocks even as most investors are selling. This long-term perseverance continues to serve us well.‘Asia isn’t seen as the world’s factory any more, but as a primary hub for innovation, leading the globe in areas such as e-commerce, 5G, gaming and social media.’

Asian innovation Innovative and disruptive technology is creating tremendous opportunities. Asian companies are now at the forefront of transforming the global landscape. It’s a dynamic sector. In the decade to 2020, Asia accounted

for 52% of global growth in technology revenues and 51% of worldwide research and development spending. Asian firms also filed some 87% of global technology patents.3

Asia isn’t seen as the world’s factory any more, but as a primary hub for innovation, leading the globe in areas such as e-commerce, 5G, gaming and social media. TikTok has twice as many users as Twitter. Technological innovation is cutting costs sharply as the world readies for a lower-carbon future. Asia is also a leader in automation technology – the next leg of industrial growth. It underscores how fertile Asia is for active investors.

The COVID-19 pandemic COVID-19 has driven a need for a new way of thinking among governments, citizens and investors the world over. Asian policymakers have provided unprecedented support for economies, businesses and workers in the region. But today, governments are asking companies to do more than just make a profit. They also need to provide a social return. Investors must understand how a firm’s operating model aligns with the needs of a wider range of stakeholders.

Supply chains are changing, too. The ‘just-in-time’ model – prevalent in areas such as car manufacturing, electronics and fashion – faced huge strains during lockdowns and quarantines. Many supply chains proved brittle. Now more cautious businesses are moving to a ‘just-in-case’ model – when a firm orders more raw materials than it needs and/or produces more products than it thinks it might sell.

Trading relationships are changing, caught between an evolving US-China rivalry. Continuing to focus on Asia’s relationship with the West risks overlooking the importance of regional trading hubs. The 10-nation Association of Southeast Asian Nations (Asean) now resembles a single market of 625 million consumers, while Thailand has become a trading hub for a group including Cambodia, Laos and Vietnam. Investors need to be aware of these shifting dynamics.

Sustainability and ESG We are witnessing the growth of ESG awareness in Asia, which is having a marked influence on decision-making. For years, Asia focused exclusively on the ‘G’. However, as companies and investors came to realise the value of ‘E’ and ‘S’, the discipline of ESG analysis has spread. Asian policymakers are embracing a sustainable agenda, including in China and India, which have pledged to hit net-zero carbon emissions by 2060 and 2070 respectively.

From the very start of our journey, ESG considerations were fundamental to how we invested. ESG analysis helps us to understand how a business operates and assesses risk. It allows us to develop a rounded understanding of a company and its management, enabling us to gauge if an investment risk is priced appropriately.

Last year we created the abrdn Sustainability Institute in Asia Pacific. This is a centre of excellence and innovation that drives sustainable solutions for clients and embeds sustainable investing capabilities and infrastructure across the region. These include our SFDR Article 9 strategies investing in companies whose products and services play a crucial role in tackling climate change. We’ve also developed solutions aligned to the UN’s Sustainable Development Goals. These seek to deliver both an attractive return and a positive societal impact. Additionally, we offer Article 8 sustainable and responsible investment strategies for emerging market equities and debt.

Our institute engages our clients and investors on sustainability issues. In the week of May 23-27 of this year, we will host our inaugural Sustainability Week to mark the 30th anniversary of our presence in Asia. Experts from abrdn and across the industry will discuss key themes including sustainable investing, climate change and net zero. We will focus on Asian markets, addressing opportunities, risks and changing regulations.

Final thoughts… Asia’s standing in the world has changed dramatically over the past three decades. Looking ahead we see abundant opportunities for investment, with issues around sustainability and climate change likely to dominate the landscape.

We’re confident that Asian companies – with their technological edge and supportive political and economic backdrop – will play an integral role in steering this global agenda.

Chairman, abrdn Asia Pacific

Asia is developing into an economic powerhouse at an astounding rate.

Asian markets have shown remarkable resilience and have emerged stronger from past crises.

Innovative and disruptive technology is creating tremendous opportunities. Asian companies are now at the forefront of transforming the global landscape.

COVID-19 and the US-China rivalry have led to changes in supply lines and the growing importance of regional hubs.

ESG awareness is growing in Asia. This is having a marked influence on decisionmaking.

For professional investors only – Not for use by retail investors or advisers. The value of an investment is not guaranteed and can go down as well as up. An investor may get back less than they invested. The above marketing document is strictly for information purposes only and should not be considered as an offer, investment recommendation, or solicitation, to deal in any of the investments or funds mentioned herein and does not constitute investment research. abrdn does not warrant the accuracy, adequacy or completeness of the information and materials contained in this document and expressly disclaims liability for errors or omissions in such information and materials. Issued in the Netherlands: Produced by abrdn Investment Management Limited which is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL and authorised and regulated by the Financial Conduct Authority in the UK. Unless otherwise indicated, this content refers only to the market views, analysis and investment capabilities of the foregoing entity as at the date of publication. Issued by Aberdeen Standard Investments Ireland Limited. Registered in Republic of Ireland (Company No.621721) at 2-4 Merrion Row, Dublin D02 WP23. Regulated by the Central Bank of Ireland.