The Shifting Geopolitics and The New Asian Tigers

• The shifting geopolitics between US and China have created both challenges and opportunities for various countries in Asia.  Some countries in Asia have benefited while some others have faced challenges such as trade disruptions, political upheavals and weakening economic growth prospects.

• We have identified several key criteria for our choice of the New Asian Tigers which include sustainable economic growth, technology leadership, having world class companies/brands and supportive government policies.

• Our choice for the New Asian Tigers is Japan, South Korea and Singapore.  

• Japan will regain its global economic powerhouse status.  Improving economic growth, corporate profitability and cash flows will propel its stock market index to the all time high of 40,000 in the near term.

• South Korea will benefit from the trough of the semiconductor cycle and will leverage on its technology progress and world class brands to become the technology powerhouse in Asia, cementing its status as the New Asian Tiger.

• Singapore will capitalize on its global financial centre hub status to attract global wealth and diversify into the “New Singapore” opportunities of technology, renewable energy, healthcare, data and logistics.

Investors can have exposure to these New Asian Tigers via some of the Funds listed in our FSMOne website. 

Japan: Eastspring Investments – Japan Dynamic Fund/JP Morgan Funds – Japan Equity

South Korea: LionGlobal Korea Fund/JPMorgan Funds – Korea Equity

Singapore: Nikko AM Shenton Thrift Fund/Nikko AM Singapore Dividend Equity/SPDR Straits Times Index ETF (SGX:ES3)

The Incumbent Asian Tigers

The incumbent Asian Tigers refers to the highly developed economies of Hong Kong, Singapore, South Korea, and Taiwan. These countries experienced rapid economic growth and industrialization from the 1960s to the 1990s, transforming them from low-income nations to high-income ones. The evolution of the Asian Tigers can be summarized into the following 3 broad phases: Export Oriented industrialization (1970s -1980s), technological upgrading to higher value-added goods (1980s-1990s), financial and services sector development (1990s-present).

Throughout these stages, the Asian Tigers benefited from various factors that contributed to their success. These include strong government leadership, stable political environments, strategic economic planning, investment in education and infrastructure, and a skilled and disciplined workforce. Additionally, their geographical locations as gateways to Asia and their ability to adapt to changing global economic conditions played a significant role in their evolution.

By the early 21st century, the Asian Tigers had developed into high-income economies, building on their distinct competitive advantages. Hong Kong and Singapore have developed into leading international financial centres, joining the league of New York, London and Tokyo in the global arena. On the other hand, South Korea and Taiwan became leaders in the manufacturing and technology space with corporations like Samsung Electronics, Hyundai Motors, Foxconn Technologies and Taiwan Semiconductor Manufacturing Company (TSMC) becoming world renowned companies.

However, it is important to note that the Asian Tigers also faced challenges along the way. They experienced financial crises in the late 1990s, which exposed vulnerabilities in their financial systems and led their economies into deep recession.  South Korea, in particular was forced to turn to the International Monetary Fund for a bailout when the Asian Financial Crisis drove the country into a sovereign default crisis due to the inability to settle external debt caused by the depletion of its foreign reserves.  

The emergence of China into a world economic power under the leadership of Deng Xiaoping (through economic reforms, manufacturing prowess, infrastructure development, technological advancements and integration into the global economy) since the early 1990s took some shine off the 4 Asian Tigers.  Nevertheless, the Asian tigers were still able to continue their growth trajectory, leveraging on the surging Chinese economy.

What has changed?

The shifting geopolitics over the past few years have vastly changed the Asian landscape. The rivalries between the United States and China have created both challenges and opportunities for various countries in Asia.  While it is difficult to predict the exact beneficiaries, Southeast Asian countries may benefit from increased investment and trade diversification. Countries such as Vietnam, Thailand, and Malaysia, have already been attracting manufacturing and supply chain relocation from China due to lower labour costs and favourable business environments. The ongoing trade war between the US and China has further accelerated this trend, as companies seek to mitigate risks and diversify their production bases.  India may also benefit from the “China Plus One” strategy as it seeks to position itself as an alternative manufacturing hub to China. 

It is important to note that the shifting geopolitics between the US and China also create uncertainties and risks for many countries. Increased tensions, trade disruptions, and geopolitical rivalries can have negative impacts on global stability and economic growth.  For example, Hong Kong, whose fortunes have been closely linked with China, may be negatively impacted by this geopolitical shift.  Taiwan, although still a world-class technological and manufacturing hub, will be drawn into the political conundrum of an increasingly aggressive stance from China that Taiwan is an undisputed part of China.  Potential military confrontation (which will likely involve the US) between China and Taiwan will further exacerbate the risk.

Criteria for New Asian Tigers

In recent years, there has been a growing interest in identifying the "New Asian Tigers" which refers to a group of economies in Asia that have shown significant economic growth and development potential. While there is no universally agreed-upon list of the New Asian Tigers, it is important to take a step back to think through what should be the key criteria to become the “New Asian Tigers”.  In our opinion, the following are some of the key criteria:

(1) Beneficiary of the shifting geopolitics between US and China

(2) Sustainable (but not necessarily high) economic growth in the next few decades.  A key metric to look at for sustainable economic growth will be Current Account as a percentage of GDP. Countries with consistently positive Current Account Surplus will likely experience a more sustainable economic growth trajectory over the longer term.

(3) World Class Companies/World Class Brands

(4) Technology leadership

(5) Supportive and coherent government policies.

Based on the above criteria, our choice for the New Asian Tigers are Japan, South Korea and Singapore.  This list may look very different from the more consensus choice of China, India, Indonesia and Vietnam.  We will explain our choice in greater details in the sections below.

JAPAN

Since the Japanese economy collapsed in the late 1980s and the rise of China since the Deng Xiaoping’s era, Japan has lost its economic powerhouse status and felt very much like a “lost nation” for the past 2-3 decades.  Although economic growth has been anaemic, Japan was still able to consistently post positive current account surplus over the past 3 decades as shown in the chart below:

This strong economic backdrop, together with the improving corporate fundamentals over the past 2 decades (see below chart) since the Global Financial crisis, has set the stage for the “big Japan revival” in the coming years.

Japan has been implementing economic reforms to stimulate growth and increase competitiveness over the past 2 decades. These reforms include deregulation, corporate governance improvements, and efforts to attract foreign investment.  All these have resulted in a steady improvement of corporate profitability (both earnings and net margins) and cashflows as can be clearly seen from the chart above.

Japan, with a highly educated and skilled workforce, has also a long history of technological innovation and is known for its advanced manufacturing capabilities. The country has a strong research and development sector, which has led to the creation of cutting-edge technologies in areas such as robotics, electronics, and automotive manufacturing. This technological prowess can give Japan a competitive edge in the global market and with the on-going US-China rivalries, it has the potential to re-emerge as a global semiconductor powerhouse.  

Japan’s strong industrial base has also created many well-known World-Class brands in the areas of automotive manufacturing, electronics, machinery, and precision instruments. These industries have a strong global presence and contribute significantly to Japan's economy. 

Although stock market performance is not a key criteria which we used to select the New Asian Tiger, the Japanese stock market has seen a big reversal of fortune since its collapse in the late 80s.  The stock market has been range bound since then but for the past decade, due to the strong recovery in corporate earnings and fundamentals, the stock market has recovered strongly and is on course to retest the all-time high level of 40,000 in the near future with all the positive tailwinds behind it.

In summary, while Japan faces challenges such as a shrinking population and competition from other Asian economies, its technological prowess, skilled workforce, strong industrial base, economic reforms, and regional integration efforts provide a solid foundation for it to become a new "Asia Tiger" and regain its position as an economic powerhouse in the region.

SOUTH KOREA

South Korea has recovered very strongly after facing a severe financial crisis in the late 1990s (Asian Financial Crisis), triggered by a combination of economic mismanagement and high corporate debt.  The government implemented significant economic reforms, including corporate restructuring and financial sector reforms, which helped the country recover and emerge stronger. The chart below shows that after the Asian Financial crisis, South Korea has been able to consistently maintain a Current Account Surplus and strong economic growth.

With a strong industrial base, particularly in sectors like electronics, automobiles, shipbuilding, and petrochemicals, South Korea has been able to propel itself into the global arena with World Class brands and corporations such as Samsung, LG and Hyundai.  For example, the only real competitor to Apple iPhones is Samsung phones, with both brands dominating the mobile phone market share globally

Even South Korea’s K-pop music and TV dramas have gained immense popularity worldwide, with K-pop groups such as BTS, Black Pink and K-dramas such as Squid Game becoming a global sensation. 

South Korea is known for its technological prowess and innovation, supported by a  highly educated and skilled workforce. With the government actively promoting research and development over the years, it should not be a surprise that it has developed world class corporations like Samsung, LG and Hynix.  Other than consumer electronics products, Samsung and Hynix are also important global players in the semiconductor sector, with both companies dominating DRAM manufacturing with a global market share of 40.7% and 28.8% respectively.  The 3rd largest player is Micron, a US company, with a market share of 26.4%.   

The importance of technology and semiconductor sector to the South Korean economy can also be seen from the chart above, with both Samsung and Hynix accounting for nearly 25% of the Korean stock market index weighting.  With the semiconductor cycle likely to bottom out in the next 1-2 quarters, South Korean exports will undoubtedly rebound and this will be a boost to South Korea’s economic growth. Over the longer term, the technological dominance will also give South Korean semiconductor companies a competitive edge in the global market, especially with the on-going US-China stand-off.

The Korean stock market has also seen a strong recovery after the Global Financial crisis. Although there was some pullback in recent years, with corporate earnings expecting to stage a strong rebound in the coming 2-3 years, we will see more upside in the South Korean stock market from current levels.  

While South Korea faces challenges like an aging population and geopolitical threat from North Korea, its strong economic fundamentals, technological advancements, and supportive government policies augurs well for its position to become the new Asian Tiger.

SINGAPORE

Singapore has often been referred to as one of the original "Asian Tigers" alongside Hong Kong, South Korea, and Taiwan. While Singapore has already achieved significant economic success, it is possible for the country to continue its growth trajectory and become a new Asian Tiger in the future.  The government’s entrenched mindset of the importance of “investing towards prosperity” and building on its cash coffers has made Singapore one of the richest countries globally with an enviable foreign reserves amounting to hundred of billions of US dollars (this is not an official number as Singapore does not officially published the amount of their foreign reserves).  This has been partly achieved by having a consistently large current account surplus over the past 3 decades as shown in the chart below:

Singapore’s strong economic fundamentals and fiscal position has also translated into a strong appreciation of the Singapore Dollar exchange rate over the past few decades, making it one of the strongest currencies globally (see chart below)

As Singapore is a very small country (in terms of land size and human resources), the government realised very early that it must invest heavily in education and skills development, resulting in a highly skilled and productive workforce. The country's emphasis on lifelong learning and continuous upskilling ensures that its workforce remains competitive in the global market. Knowing that it does not have a competitive advantage as a manufacturing hub, Singapore has successfully diversified its economy beyond manufacturing into sectors such as finance, logistics, tourism, and technology.  Through such initiatives, Singapore has also created some of its own World Class Brands and Corporations like Singapore Airlines and DBS Bank.

Singapore’s development into a key global financial centre, joining the league of New York, London, Japan and Hong Kong, has been the result of proactive government policies of attracting foreign investments, promoting free trade, providing a stable business environment, and investing in infrastructure and human capital.  In recent years, Singapore’s financial sector has also benefited from the shifting geopolitics between the US and China, which saw an influx of regional wealth.  It was reported that the number of single-family offices based in Singapore has increased from 400 at the end of 2020 to 1,100 in 2022.  Total assets managed in Singapore as at end 2021 amounted to S$5.4 trillion, largely from institutional investors.

Singapore’s continuing status as a “New Asian Tiger” will be highly dependent on its economic diversification into the “New Singapore” opportunities of technology, renewable energy, healthcare, data and logistics while further entrenching its strong foothold in the financial sector.  While Singapore will face challenges such as an aging population, limited land resources and an open economy that is heavily dependent on trade (and hence will be adversely affected by global economic uncertainties), we believe that Singapore will be able to retain its Asian Tiger status given the proactive government policies of attracting foreign investments, promoting free trade, providing a stable business environment, and investing in infrastructure and human capital.

The Research Team is part of iFAST Financial Pte Ltd.