The “China plus One” strategy has been pursued by companies around the world for quite some time now and the Covid-19 outbreak and the Russia-Ukraine war have accelerated the trend. One of the biggest beneficiaries of “China plus One” are the Southeast Asian countries, particularly the 10-member ASEAN block. Fidelity International takes a look at the potential of the region.

As per the asset manager, ASEAN stands out due to its young and growing population, with a median age of 30 compared to aging populations in other major economies. The region’s fast-rising middle class is driving consumption, and GDP per capita is projected to grow by 3% – 4% annually through 2030.

The Covid-19 pandemic and China-US trade tensions have exposed the vulnerabilities of supply chains overly reliant on globalization and just-in-time practices. This has accelerated the realignment of global supply chains, and Southeast Asia has become one of the top destinations for foreign direct investment, catching up to China in recent years.

“While multinational firms branch out into Southeast Asia, we think global investors can also benefit from diversifying their emerging-market exposure into this region, where growth is decent and valuations fair,” writes Madeleine Kuang, Portfolio Manager at Fidelity. “We see a tendency among global funds to go underweight ASEAN relative to its economic clout, which suggests ample room for future inflows to the region’s equities and fixed income markets.”

Looking at a country level, Kuang points out that the region is witnessing the emergence of highly competitive and diversified manufacturing hubs. Vietnam has become a significant player in electronics manufacturing, while Malaysia is producing desktop computers for global brands, and Thailand is developing into a regional hub for automobile manufacturing, including electric vehicles. Indonesia, with its rich resources, is focusing on nickel mining and battery production for electric vehicles.

However, while business investments flourish, the development of ASEAN financial markets has not kept pace, as per Fidelity. The region accounts for less than 8% of the MSCI Emerging Asia index, compared to around 18% for India. Limited liquidity in ASEAN markets and the memory of past financial crises also contribute to investor caution.

“While the region’s financial infrastructure still appears underdeveloped, this implies room for future growth and opportunities for early movers. With strong demographic and ‘China plus One’ tailwinds, provided local financial markets also catch up, a new factory of the world could rise in ASEAN,” writes Kuang.

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