03/09/2024 | News release | Distributed by Public on 04/09/2024 12:08
The East's economic power has been building for decades. Buoyed initially by Japan's industrialization, the region was boosted further by the modernization of Hong Kong, Singapore, South Korea and Taiwan, alongside the rapid rise of China (Figure 1).
India, Vietnam and other Southeast Asian countries have stepped up to anchor the region's growth and importance, moving away from over-reliance on China and creating new investment opportunities into and out of Asia Pacific (APAC).
Over the coming decades, an increasing number of people will move to cities in APAC, driving the ongoing rise of the middle class, wealth and consumption. The services sector will continue to expand across the region, and a better educated workforce will also drive innovation and upgrading of the industrial value chain. The factors will help drive opportunities across real asset classes in APAC.
China's current downturn is emblematic of both cyclical, structural and geopolitical headwinds. Its growth slowed from 9% in the early 2000s to around 5% currently. While this will take time to resolve, other emerging economies are rising to the fore to continue APAC's march in the 21st century.
India and Southeast Asia are expected to strengthen, accounting for an estimated 42% of regional GDP by 2040, from 33% currently. These countries are backed by a youthful and sizeable population, adding up to more than 2 billion people.
Domestic demand, on top of a reconfiguration of global supply chains due to geopolitical tensions, will continue to draw foreign direct investments into the region, underscored by relatively attractive total factor cost of production.
Across APAC, the youth demographic will help increase the long-term demand for real estate, underscoring unique and multifaceted investment opportunities for institutional investors. Different sectors and locations will become more attractive over time as various long-term structural demographic trends, such as urbanization with greater mobility and growing middle class, unfold.
Home to half of the world's population, APAC is already the world's largest energy consumer (Figure 2). Future economic and demographic expansion - along with commitments on net zero carbon targets - will create even more investment and business opportunities, particularly in green energy. The Energy Transition Commission estimates that around $3.5 trillion2 of annual capital investment is required until 2050 to drive an effective energy transition.
Alternative energy will become increasingly important in this shift. Solar PV and wind are the primary focus since they are at or close to grid parity with fossil fuels. Nuclear energy is important to achieving a carbon neutral agenda, and Asia is a major region for pursuing this, with around two-thirds3 of the nuclear plants under development worldwide in the region.
Being at the vanguard of global renewable energy expansion does not yet equate to ease of access and purchase of green energy in the region. Some countries may not be self-sufficient in renewables, and/or their power networks are not connected to neighboring countries' grids. This makes it impossible to import green electricity, creating demand for both energy storage, such as battery energy storage systems and clean fuels, such as green hydrogen/ammonia.
China and South Korea are major markets in the battery industry since they have a strong manufacturing base along the full value chain. Battery technology is already starting to play a critical role in short-term storage to stabilize the grid.
For transporting green energy over long distances, green hydrogen/ammonia molecules are a more cost-effective option than transporting electricity. Their higher energy density than battery technology and suitability for long-term storage are distinct features considered a key solution to decarbonizing the industry, long-haul flights and long-range shipping.
Australia is a highly promising market for the development of green hydrogen/ammonia. Its abundant land and renewable resources allow it to produce green hydrogen more affordably than anywhere else in the world. Therefore, it is expected that Australia will become the largest exporter of green hydrogen/ammonia in the world in the next several years.
Over the past few decades, APAC's rapid economic development has lifted large groups of people out of poverty. Consumers now spend more on food - particularly protein rich food - and consume a wide range and increasing volume of wood products, from lumber for construction and housing, to wood pulp for basic consumer products like tissue and packaging.
Countries in the region, and many around the world, face the challenge of meeting growing demand for food and timber in an environmentally friendly and socially responsible way.
Adding to the challenge, extreme weather, water scarcity, pollution, climate change, unsustainable land management practices, the need to protect shrinking natural areas, and restrictions on land use conversion have further constrained supply. This opens up an opportunity for the private sector to fill the gap.
Imports are an important way to address the demand and supply imbalances of natural resources. China imports more agricultural products than any other country and its dependency on food imports is an example of the challenges and risks posed by food insecurity4.
In contrast, Australia and New Zealand stand to gain from exporting agricultural and wood products because of their highly productive timberland and farmland base and close proximity to major importing countries in Asia such as Japan and Indonesia. Favorable logistics allow them to compete on price with other exporters outside the region.
The East's growth continues to be supported by positive structural tailwinds. Demographics, wealth accumulation, supply chain reorientation and the expansion of the regions' emerging markets bolster its long-term prospects.
This will provide investors with greater opportunities to tap into APAC's growing economic dominance. However, it is not all about real estate opportunity. The acceleration of the transition to a low carbon economy presents attractive opportunities in energy infrastructure. And greater disposable income and the switch to higher value consumption creates compelling investment thesis for natural capital. These trends will enable global institutional investors to build a well-diversified portfolio across different sectors and asset classes.