Key points:
- Asia is a growth engine with diversification benefits: Contributing about 60% of global GDP growth, Asia’s economies offer uncorrelated cycles, diverse currencies, and sector exposures missing in Western markets.
- Country-level structural themes are investable: Japan’s corporate reforms and reshoring, China’s innovation leadership, India’s digital demographic boom, and Taiwan/Korea’s dominance in AI hardware provide long-term growth drivers.
- Passive investing isn’t enough: The MSCI World index allocates only ~8% to developed Asia (mostly Japan) and excludes China, India, Taiwan, and Korea altogether. This means that the world tracker leaves investors underweight Asia’s growth engines.
- Attractive entry points and valuation appeal: Many Asian markets trade at discounts to U.S. peers, creating opportunities for selective, sector-led investments that can enhance portfolio resilience.
For many global investors, Asia remains an underweight in portfolios despite driving 60% of global GDP growth.
With U.S. equities priced for perfection and European indices struggling to generate fresh momentum, Asia offers not just growth, but potential for structural diversification.
Japan: Corporate reform, reshoring, and resilience
Japan is undergoing a quiet revolution in corporate governance. The Tokyo Stock Exchange has pushed listed companies to improve capital efficiency, return more to shareholders, and meet higher disclosure standards. This has translated into record dividends, larger share buybacks, and a rise in return on equity—shifting the market from a value trap to a shareholder-friendly growth story.
The macro backdrop adds tailwinds:
- Reshoring: Global supply chain diversification is bringing advanced manufacturing back to Japan, especially in semiconductors and EV components.
- Trade alignment with the U.S.: The recent U.S.–Japan trade framework capped tariffs on Japanese goods—including autos—at 15%, down from the 25% levels that had been threatened. While not sector-specific, this more predictable framework is more favorable than what many other economies received and could strengthen Japan’s role as a trusted supply partner to the West.
- Defense spending: Rising security budgets, including investments in aerospace and cyber, are driving growth for defense and industrial suppliers.
For foreign investors, Japan offers deep liquidity and globally recognised brands such as Sony, Nintendo, and SoftBank, alongside automation leaders like Keyence and semiconductor equipment makers like Tokyo Electron. The yen’s relative weakness adds another layer of appeal by boosting export earnings and lowering entry costs for euro- and dollar-based investors.
China: Innovation at scale
The perception of China as purely an export-driven manufacturer is outdated. China is transitioning to be the world’s innovator and is building significant edge across sectors like electric vehicle production, green tech, and AI infrastructure supported by deep, state-aligned resources.
Key pillars of China’s innovation advantage:
- Data – With more than a billion mobile phone users under a centralised governance system, China’s AI developers have access to one of the largest, most integrated datasets in the world.
- Energy – China brought 10 new nuclear power plants online last year and has another 10 in the pipeline, providing a stable and low-carbon energy base for energy-intensive tech growth.
- Talent – According to the World Economic Forum, 47% of the world’s top AI researchers are now based in China, giving it a deep talent pool in one of the most strategic technologies of the century.
- Computing – While U.S.-made chips still hold a performance lead, Chinese capabilities are closing the gap quickly through domestic innovation and alternative architectures.
- Regulation – A comprehensive AI governance framework with more than 250 regulatory standards ensures development is secure, ethical, and strategically aligned with national priorities.
From BYD and NIO in EVs, to Hua Hong and SMIC in AI hardware, to internet giants like Tencent and Alibaba, China’s innovation ecosystem is catching up to U.S. peers at a rapid pace. Valuations, compressed by regulatory and geopolitical concerns, present entry points for investors willing to take a selective, sector-led approach.
India: The digital demographic dividend
India combines the scale of China’s consumer base with the governance of a democratic system and a technology-first growth model. Demographics are a major driver, with India’s working-age population expanding, and its middle class spending more on financial services, travel, and digital goods.
Key themes:
- Digital infrastructure – India’s nationwide digital ID system and instant payment network are making it faster and cheaper for people and businesses to move money, fueling rapid fintech growth.
- ‘China+1’ manufacturing shift – Global firms are diversifying production into India, boosting industrial output and exports.
- Urban infrastructure – Public and private investments in housing, transport, and energy create multi-year demand across sectors.
Internationally traded Indian companies include Infosys, Tata Consultancy Services, HDFC Bank, ICICI Bank, Tata Motors, and Dr. Reddy’s Laboratories, provide exposure across technology, financial services, consumer, and healthcare sectors.
Taiwan and Korea: The AI hardware core
If the U.S. builds AI platforms, Taiwan and Korea supply the components that make them work.
- Taiwan’s TSMC dominates advanced chip manufacturing, serving Nvidia, Apple, and AMD.
- Korea’s Samsung Electronics and SK Hynix lead in memory chips critical for AI data processing.
These markets are also beneficiaries of reshoring and “friend-shoring” trends as Western economies seek secure supply chains for critical tech infrastructure.
Passive isn’t enough
A “world” ETF is not the world. The MSCI World Index gives investors roughly 8% exposure to developed Asia (Japan ~5%, Australia/Hong Kong/Singapore/New Zealand in low single digits) and 0% exposure to China, India, Taiwan, and Korea. That is a sharp mismatch with Asia’s economic weight, which comes in about 40% of world GDP and contributing about 60% of growth. This suggests investors relying only on passive global trackers are systematically underexposed to the growth and AI story in Asia.
How Asia diversifies portfolios
Adding Asia to a European or U.S.-centric portfolio brings:
- Index gap: MSCI World is about 8% allocation to Asia vs. Asia accounting for 40% of global GDP and ~60% of global growth.
- Economic cycles: Asia’s growth drivers (e.g., domestic consumption in India, export manufacturing in Taiwan, innovation in China) are less synchronised with U.S. or EU cycles.
- Currencies: Exposure to yen, yuan, rupee, and won can help hedge against euro volatility.
- Sector composition: Asia provides heavy weightings in semiconductors, EVs, green tech, and high-growth consumer markets—sectors underrepresented in European indices.
- Valuation profile: Many Asian markets trade at a discount to U.S. peers, offering better entry points for long-term compounding.
Risks to balance
- Policy and tariff risks remain significant: The U.S. trade stance can shift quickly, creating uncertainty for Asian exporters, especially in autos, semiconductors, and consumer goods.
- Geopolitical tensions could escalate: Flashpoints such as the Taiwan Strait, U.S.–China tech rivalry, and broader conflicts may disrupt trade and capital flows.
- Foreign exchange and interest rate divergence add volatility: Currencies such as the yen, yuan, rupee, and won may swing sharply, especially as central banks in Asia and the West move at different speeds.
- Regulatory risks in China are not going away: Policy changes in technology, data governance, and capital markets can weigh on valuations and investor sentiment.
Bottom line
For global investors, Asia is not a tactical bet, but it is a strategic allocation that brings exposure to uncorrelated economic cycles, diverse currencies, and sectors underrepresented in Western markets.
Passive world trackers underweight Asia’s economic reality, so investors who want Asia’s growth must allocate deliberately.
