Arguments for diversifying your portfolio into the Asian market for global investors

For many global investors, the Asian market remains undervalued in investment portfolios, despite driving 60% of global GDP growth. While US equities remain highly valued and European indices struggle to generate new momentum, Asia offers not only growth but also the potential for structural diversification.

Japan: Corporate Reforms, Production Relocation, and Resilience

Japan is undergoing a quiet corporate governance revolution. The Tokyo Stock Exchange has challenged listed companies to improve capital efficiency, increase shareholder returns, and meet higher disclosure standards. This has translated into record dividends, increased share repurchases, and increased returns on equity, transforming a market that was once considered a value trap into a shareholder-friendly growth story.

The macroeconomic backdrop provides additional support:

• Relocation: Diversification of global supply chains is bringing advanced manufacturing back to Japan, particularly in the area of semiconductors and components for electric vehicles.
• Trade cooperation with the United States: The new U.S.-Japan trade agreement capped tariffs on Japanese products, including cars, at 15%, down from the previously announced 25%. While this doesn't apply to specific sectors, these terms are more favorable than those received by many other economies, which could strengthen Japan's role as a trusted supply partner for the West.
• Defense spending: Growing security budgets, including investments in the space and cyber sectors, are driving growth for defense and industrial suppliers.

For foreign investors, Japan offers high liquidity and globally recognized brands such as Sony, Nintendo and Softbank, as well as automation leaders like Keyence and semiconductor equipment manufacturers like Tokyo Electron. The relatively weak yen further increases the market's attractiveness, boosting export revenues and lowering entry costs for euro- and dollar-denominated investors.

China: Innovation on a Large Scale

The perception of China as solely an export-driven producer is outdated. China is transforming into a global innovation leader, gaining significant leadership in sectors such as electric vehicle manufacturing, green technologies, and AI infrastructure, supported by deep resources aligned with state policy.

Key pillars of China's innovation advantage:

• Data - With over a billion mobile phone users under a centralized management system, Chinese AI developers have access to one of the largest and most integrated datasets in the world.
• Energy - China launched 10 new nuclear power plants last year and has another 10 planned, providing a stable and low-emission energy base for the development of energy-intensive technologies.
• Talent – According to the World Economic Forum, 47% of the world's top AI researchers currently work in China, giving the country a rich pool of talent in one of the most strategic technologies of this century.
• Calculations – While U.S.-made chips still have a performance advantage, Chinese capabilities are rapidly closing the gap thanks to domestic innovation and alternative approaches to chip design.
• Regulation – A comprehensive AI governance framework, encompassing over 250 regulatory standards, ensures that the development of this technology is safe, ethical, and aligned with strategic national priorities.

From BYD and NIO in electric vehicles, to Hua Hong and SMIC in AI technologies, to internet giants like Tencent and Alibaba, China's innovation ecosystem is rapidly catching up with its American competitors. Valuations, depressed by regulatory and geopolitical concerns, are creating entry points for investors who choose a selective, sector-focused approach.

India: Digital Demographic Dividend

India combines the size of China's consumer base with a democratic governance system and a technology-centric growth model. Demographics are a key driver of growth, as India's working-age population grows and the middle class increases its spending on financial services, travel, and digital goods.

Key topics:

• Digital Infrastructure – India's nationwide digital ID and instant payments system make it faster and cheaper for individuals and businesses to send money, fueling the rapid growth of the fintech sector.
• Shift towards 'China+1' in production – Global companies are diversifying their production by moving it to India, which increases industrial capacity and exports.
• Urban infrastructure – Public and private investments in housing, transport and energy generate long-term demand across various sectors.

Indian companies listed on international markets, such as Infosys, Tata Consultancy Services, HDFC Bank, ICICI Bank, Tata Motors and Dr. Reddy's Laboratories, offer exposure to the technology, financial services, consumer and healthcare sectors.

Taiwan and Korea: A Key AI Technology Hub

While the US is building AI platforms, Taiwan and Korea are providing the components that make them work.

• Taiwanese company TSMC dominates the production of advanced chips, serving brands such as Nvidia, Apple and AMD.
• Korean companies Samsung Electronics and SK Hynix are leaders in the production of memory cards, key for AI data processing.

These markets are also benefiting from trends in manufacturing relocation and friend-shoring as Western economies seek secure supply chains for their technology infrastructure.

Passive investing is not enough

ETF type "world" is not the whole world. Index Msci World offers investors around 8% exposure to developed Asia (Japan ~5%, Australia/Hong Kong/Singapore/New Zealand in the low single digits) and 0% exposure to China, India, Taiwan, and Korea. This is a significant discrepancy compared to the economic importance of Asia, which accounts for around 40% of global GDP and around 60% of growth. This means that investors relying solely on passive global trackers are systematically underestimating the growth potential and AI development in Asia.

How Asia Diversifies Its Portfolios

Adding Asia to a portfolio focused on Europe or the US brings:

• Index gap: MSCI World allocates about 8% to Asia, while Asia accounts for 40% of global GDP and about 60% of global growth.
• Economic cycles: Growth factors in Asia, such as domestic consumption in India, export production in Taiwan, or innovation in China, are less synchronized with cycles in the US or the EU.
• Currencies: Exposure to the yen, yuan, rupee and won can help protect against euro volatility.
• Sectoral structure: Asia offers significant shares in semiconductors, electric vehicles, green technologies and fast-growing consumer markets—sectors underrepresented in European indices.
• Valuation profile: Many Asian markets trade at a discount to their US counterparts, offering better entry points for long-term capital growth.

Risks to consider

• Policy and tariff risks remain significant: The US trade approach can change rapidly, creating uncertainty for Asian exporters, especially in the automotive, semiconductor and consumer goods sectors.
• Geopolitical tensions may escalate: Flashpoints like the Taiwan Strait, the US-China technology rivalry, and broader conflicts can disrupt trade and capital flows.
• Differences in currency exchange and interest rates increase volatility: Currencies like the yen, yuan, rupee, and won can fluctuate significantly, especially when central banks in Asia and the West operate at different rates.
• Regulatory risks in China will not disappear: Policy changes in technology, data management and capital markets can impact valuations and investor sentiment.

Summary

For global investors, Asia is not a tactical bet, but a strategic allocation that provides exposure to uncorrelated economic cycles, diverse currencies and sectors underrepresented in Western markets.

Passive global indices do not fully reflect the economic reality of Asia, so investors who want to benefit from its growth must make thoughtful allocations.

About the Author

Charu Chanana, market strategist in the Singapore branch Saxo Bank. She has over 10 years of experience in financial markets, most recently as Lead Asia Economist in Continuum Economics, where she dealt with macroeconomic analysis of Asian emerging countries, with a focus on India and Southeast Asia. She is adept at analyzing and monitoring the impact of domestic and external macroeconomic shocks on the region. She is cited frequently in newspaper articles and appears regularly on CNBC, Bloomberg TV, Channel News Asia, and Singapore's business radio channels.