• Daniel Lee

4 types of Asia and why it matters to you and your investments

Recently, McKinsey published a discussion paper titled: The future of Asia, where the authors explored the past and future developments of Asia.


In this article, I will be sharing with yall one of the topics discussed in the 84-page paper.


As the discussion paper is segmented into different topics, the focus of this article will revolve around the 4 Types of Asia identified, their characteristics, behavior and contribution towards the region’s development.


All information presented is extracted from the discussion paper itself. I am merely summarizing the findings and providing some of my inputs alongside with what was discussed in the article.

Redefining the boundaries of Asia

Instead of using geographical boundaries as a means of classifying the different types of Asia, the team at McKinsey has its own classification based on the following factors:

  1. Scale: overall GDP as well as population

  2. Economic development: the degree of development and growth potential

  3. Interactions within Asia

  4. Connectedness with the world

Based on the factors used, the team has distinguished four types of Asia which are as follows:

  1. Advance Asia

  2. China

  3. Emerging Asia

  4. Frontier Asia

Personally, I find the above classification to make more sense as opposed to the commonly adopted geographical classification.

By grouping the countries that exhibit similar characteristics, it is easier to understand the behavior and the complementary role that each of Asia plays towards contributing to the economic success of our region.


This is exceptionally important for investors as it will help you make sense of current global affairs and how it contributes to the growth of Asia and ultimately the growth of our investments.


So, let us look at the characteristics and role of each type of Asia in greater detail


Characteristics of the 4 types of Asia

Key characteristics and implications to be aware of:

  • A large part of frontier Asia’s performance and contribution is driven by India which has the second-highest level of population next to China.

  • Labour cost of China and Advance Asia is 300% and 1,000% more expensive than Emerging and Frontier Asia.

  • R&D investments are, to some extent, an indication of a country’s ability to adopt automation within their current workforce.

  • Emerging and Frontier Asia has the volume of the working-age population but most of the labor consists of non-skilled labor.

  • The urbanization rate is a key indicator of growth as urban cities/economies contribute a lion share of the world’s wealth and GDP

  • Connectedness with the world is important for the transfer of wealth and knowledge via global trade.

As each Asia exhibits different form/degree of characteristics in the above area, the roles from which they play within the region differs as well based on market forces.


While the roles that each of Asia has are inherently different and unique, they are complementary and hence vital in the scope of operations when viewed regionally.


Let us take a look.


Roles played by the 4 Asia

To summarize:

  1. Advance Asia is a major provider of capital and technology

  2. China is Asia’s anchor economy, providing connectivity and innovation platform

  3. Emerging and Frontier Asia offers labor, growth opportunities and market

The key takeaway from the above chart is that:

As China progresses from a developing to a developed country, the country is shifting its focus from labor to knowledge-intensive manufacturing. The gap left by China’s shift is being covered by the emerging and frontier Asia, supported by funds from both China and Advanced Asia.

Moving forward, given the change in supply chain dynamics, we can expect emerging and frontier Asia to experience:

  1. Increase in urbanization

  2. Increase in middle-income classes

  3. Increase in both production and consumption

All of which serve as drivers for better earnings and hence better economic and investment performances.


Why and how the 4 Asia will affect your investments

Investing is like playing a game of chess, you have to estimate and understand how your opponent will move in his next turn and position your pieces carefully to ensure your success.


The insights provided by McKinsey serve as an indication of how our opponent – the economy of Asia – is likely to behave in the near future.


As such, by understanding the characteristics and roles that each Asia plays in the economic development of our region, we can then select the right pieces to invest in that will provide us with the right kind of risk-return exposure.


Moving forward, the next step is to allocate your resources appropriately among the respective mutual/exchange-traded funds to achieve your desired risk-return behavior in response to your investment objectives.


Naturally speaking, that is if you have a clear understanding of your own investment objectives and financial plans in the very first place.


If you are reading this and would like to kick start your retirement or investment planning, you can reach out to me here and I’ll help you make sense of the options available at your current stage.


Do remember to share this article and subscribe to keep yourself up to date with investment insights.


My next few articles will revolve around the topics discussed within the 84-page paper so that you will not need to spend the time needed to read through the entire paper yourself.

Disclaimer:

This article is meant to be the opinion of the author and is for information purposes only.

This article should not be seen as a financial advice

This advertisement has not been reviewed by the Monetary Authority of Singapore


Source of information: https://www.mckinsey.com/featured-insights/asia-pacific/the-future-of-asia-asian-flows-and-networks-are-defining-the-next-phase-of-globalization

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