Geopolitical tensions, trade barriers, and the COVID-19 pandemic fallout have triggered changes in international trading patterns and growth prospects. Global trade and capital flows are increasingly influenced by the need for national security and greater resilience. This is resulting in investment opportunities in countries across EMs and Asia.

The World Trade Organisation (WTO) forecasts that trade growth would rebound to 3.3% in 2024, up from 0.8% in 2023. According to WTO, such swings are not unusual given the sensitivity of goods to business cycles and does not spell a permanent decline of world trade. Similarly, WTO suggests that evidence of deglobalization remains limited. The share of intermediate goods in world trade (an indicator of the extent of supply chains) has only fallen to 48.5% in the first half of 2023 compared to an average of 51% over the past three years.

Globalization is changing, not receding. The change will depend on the alignment of national interests, economic structures, and a country’s natural endowments plus its peoples’ skill sets. We expect the current supply chain shifts and technological developments, in particular artificial intelligence, to drive future globalization trends.

Supply chain transition winners

Exacerbated by events including the geopolitical conflict between the US and China, COVID-19 and Russia’s invasion of Ukraine, supply chain security and diversification are at the forefront of most companies’ medium-term investment plans. A structural recalibrating of global supply chains away from China and towards other markets is taking place. The beneficiaries of this move are spread across Latin America, EMEA, ASEAN and India. These countries possess cheap labour, have decent manufacturing bases and are producers of important commodities.

In Latin America, Mexico, the ‘nearshoring’ leader with geographical advantage to the US, has robust manufacturing capability, ample labour pool and important natural resources (energy, copper, lithium). The rest of Latin America is also rich in lithium and copper which are key materials for electric vehicles and renewable energy. Countries in EMEA (Poland, Hungary, Czech Republic and Turkey) have attractive demographics and competitive manufacturing bases which will benefit from ‘nearshoring’ trends of companies from advanced European economies and multinational companies.

ASEAN’s growing share of global Foreign Direct Investments (FDI) suggests that countries in the region are also benefiting from the supply chain shifts. Indonesia’s abundant nickel reserves and Thailand’s strong auto supply chain network make it ideal destinations for the electric vehicle supply chain. Likewise in the semiconductor supply chain, Malaysia has an edge in advanced packaging and testing while Singapore is a wafer fabrication hub. Vietnam’s relevance to the global supply chain is evidenced by the fact that companies such as Samsung, Google, Microsoft, and Apple have shifted portions of their supply chains there as part of their “China plus one” strategies. A fast-growing population and rising middle-income consumers add to the region’s appeal.

US is importing more from low-cost Asian countries

US is importing more from low-cost Asian countries

Source: Eastspring Investments, 2022 Kearney Annual Reshoring Index

India is yet another beneficiary of the supply chain relocation given that its labour cost is almost one-sixth that of China. The Indian manufacturing sector is already seeing robust growth and increasing FDI. Over the longer term, continued reforms and the revival of private capital expenditure will be key in sustaining India’s growth. There are early signs of private capex recovery in industries such as cement, residential and commercial real estate, industrial machinery, and electronics.

All said, we do not expect China to be decimated by the supply chain relocations, but we do see friendshoring and nearshoring creating outsized opportunities for domestic manufacturers and suppliers in some EMs. However, a point to note is that it will likely add to inflationary pressures for global consumers.

China is rebalancing, not retreating

Despite the challenges, China is unlikely to lose its manufacturing edge. Decoupling from China will be a daunting task for multinational companies given the country’s excellent infrastructure and connectivity, and extensive networks of reliable suppliers. Besides, China is also moving up the manufacturing value chain facilitated by huge investments in technology, big data, robotics, and artificial intelligence. Manufacturers also locate their factories in China to tap into China’s big consumer market more easily.

For sure, 2023 has been difficult. The downbeat sentiment on Chinese equities lingers, given slower than expected growth, lesser than expected stimulus support and the continued weakness in the property sector. In October, the government announced that it will issue an additional RMB 1 trillion special central government bonds in the fourth quarter of 2023. This significant move indicates the government’s priority to maintain steady growth in 2024.

Nevertheless, given the muted market reaction to previous stimulus measures, the focus has shifted to “whether another round of massive easing will work”. Still there are some positive signs; on a quarter-on-quarter basis, 3Q2023 GDP grew by 1.3%, exceeding the 1.0% forecast, industrial output grew by 4.6% in October 2023 from a year earlier versus the forecast of 4.4%, and consumption also beat expectations. But given that the property weakness may persist for longer, China’s headline growth will grind lower.

China’s manufacturing investment picks up

China’s manufacturing investment picks up

Source: Eastspring Investments, NBS, UBS; as of October 2023. FAI = Fixed Asset Investment.

It is however worth noting that China’s move to rebalance its growth model from investment-led to consumption-based is taking place at a faster pace. In the first three quarters of 2023, consumption contributed 83.2% to the headline GDP growth compared to 58.6% in 2019. Overall, there are structural opportunities in sectors that will gain from policy support and the consumption tilt such as advanced manufacturing, health care and consumer.

AI will transform the global landscape

Technological innovations over the years have triggered new waves of globalization. It has not only led to the rise in the digital workforce in the manufacturing and services sectors but also a rise in overall productivity. Equally, advancements in technology can replace jobs and lead to economic problems.

The current buzz is over Generative Artificial Intelligence (AI) and how it will be the next game changer for globalization. Generative AI technologies have the potential to transform or disrupt many industries, which have profound implications for productivity, growth, and profitability. Moreover, open-source AI models are more affordable and accessible than proprietary ones and as such likely to become more popular in the future.

Global Generative AI market

Investment implications

Source: Market US report as of October 2023.

Advancements in AI are very much dependent on high-end semiconductor chips which have the power to process and analyse data. In Asia, the clear beneficiaries are Taiwan and Korea. Taiwan has the full industrial supply chain to support current and future AI industry trends. Taiwanese companies that manufacture key components such as thermal/power/printed circuit boards, etc. can also benefit by providing a complete component supply chain. Korean fabs that are developing the next generation High Bandwidth Memory chip will also benefit from the widespread adoption of AI. Other Asian companies within the semiconductor supply chain such as advanced packaging and testing players in Malaysia should also benefit.

Generative AI can be used in fields such as content creation for games, movies, music, virtual reality (VR) and augmented reality (AR), etc. It can also stimulate the development of cloud computing and edge computing, and reshape industries outside of tech. These include transport (driverless cars) and healthcare (virtual doctors), education (personalised learning) and retail (inventory management). These new application areas will create additional demand for memory semiconductors. Asian gaming companies, electric vehicle manufacturers, e-commerce players and cloud providers are embracing Generative AI to enhance their offerings and improve their competitive edge.

Investment implications

Investment implications
Contributors: Samuel Bentley, Dalphin Hou, Michelle Qi, Weng Jingjing, Paul Kim, Eric Yao, Kevin Liu, Tsai Yuan Yiu, Doreen Choo, Bodin Buddhain, Liew Kong Qian, Bryan Yeong, Ngo The Trieu

Related insights

Multi asset

Navigating transitions. Seizing opportunities.

2024 will bring about multiple transitions. Some of the global...

Multi asset

Redefining sustainability

The ESG investible universe is offering more differentiated opportunities...

Multi asset

Rethinking the macro landscape

Slowing global growth and declining price pressures in 2024...

The information and views expressed herein do not constitute an offer or solicitation to deal in shares of any securities or financial instruments and it is not intended for distribution or use by anyone or entity located in any jurisdiction where such distribution would be unlawful or prohibited. The information does not constitute investment advice or an offer to provide investment advisory or investment management service or the solicitation of an offer to provide investment advisory or investment management services in any jurisdiction in which an offer or solicitation would be unlawful under the securities laws of that jurisdiction.

Past performance and the predictions, projections, or forecasts on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of Eastspring Investments or any of the strategies managed by Eastspring Investments. An investment is subject to investment risks, including the possible loss of the principal amount invested. Where an investment is denominated in another currency, exchange rates may have an adverse effect on the value price or income of that investment. Furthermore, exposure to a single country market, specific portfolio composition or management techniques may potentially increase volatility.

Any securities mentioned are included for illustration purposes only. It should not be considered a recommendation to purchase or sell such securities. There is no assurance that any security discussed herein will remain in the portfolio at the time you receive this document or that security sold has not been repurchased.

The information provided herein is believed to be reliable at time of publication and based on matters as they exist as of the date of preparation of this report and not as of any future date. Eastspring Investments undertakes no (and disclaims any) obligation to update, modify or amend this document or to otherwise notify you in the event that any matter stated in the materials, or any opinion, projection, forecast or estimate set forth in the document, changes or subsequently becomes inaccurate. Eastspring Investments personnel may develop views and opinions that are not stated in the materials or that are contrary to the views and opinions stated in the materials at any time and from time to time as the result of a negative factor that comes to its attention in respect to an investment or for any other reason or for no reason. Eastspring Investments shall not and shall have no duty to notify you of any such views and opinions. This document is solely for information and does not have any regard to the specific investment objectives, financial or tax situation and the particular needs of any specific person who may receive this document.

Eastspring Investments Inc. (Eastspring US) primary activity is to provide certain marketing, sales servicing, and client support in the US on behalf of Eastspring Investment (Singapore) Limited (“Eastspring Singapore”). Eastspring Singapore is an affiliated investment management entity that is domiciled and registered under, among other regulatory bodies, the Monetary Authority of Singapore (MAS). Eastspring Singapore and Eastspring US are both registered with the US Securities and Exchange Commission as a registered investment adviser. Registration as an adviser does not imply a level of skill or training. Eastspring US seeks to identify and introduce to Eastspring Singapore potential institutional client prospects. Such prospects, once introduced, would contract directly with Eastspring Singapore for any investment management or advisory services. Additional information about Eastspring Singapore and Eastspring US is also is available on the SEC’s website at www.adviserinfo.sec. gov.

Certain information contained herein constitutes "forward-looking statements", which can be identified by the use of forward-looking terminology such as "may", "will", "should", "expect", "anticipate", "project", "estimate", "intend", "continue" or "believe" or the negatives thereof, other variations thereof or comparable terminology. Such information is based on expectations, estimates and projections (and assumptions underlying such information) and cannot be relied upon as a guarantee of future performance. Due to various risks and uncertainties, actual events or results, or the actual performance of any fund may differ materially from those reflected or contemplated in such forward-looking statements.

Eastspring Investments companies (excluding JV companies) are ultimately wholly-owned / indirect subsidiaries / associate of Prudential plc of the United Kingdom. Eastspring Investments companies (including JV’s) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America.