Southeast Asia: Growth powerhouse shifts up a gear

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Key points:

• Strong economic growth prospects in Southeast Asia, underpinned by a growing population, natural resources, and its proximity to China, are creating encouraging potential investment opportunities
• There are three key areas we believe could be the main engines for growth: Manufacturing, renewable energy, and digital technology
• In unlocking Southeast Asia’s economic potential and investment opportunity set, investors must consider certain challenges to regional development and short-term macro headwinds

Underpinned by favourable demographics, Southeast Asia boasts vast economic potential – and given its rapidly evolving market landscape, we believe offers an array of potential long-term investment opportunities.

The Association of Southeast Asian Nations (ASEAN) – the 10-country political and economic bloc – is the fifth biggest economy in the world and on track to become the fourth largest by 2030, according to the World Economic Forum.¹

In 2021, the bloc’s GDP reached $3.3trn, a marked rise on previous years.² And currently, the Organisation for Economic Co-operation and Development forecasts 5.2% GDP growth for the ASEAN economy in both 2022 and 2023 – compared to just 3.1% and 2.2% respectively for the wider world.³

Despite current macro headwinds, including persistent inflation in some countries, a likely global economic slowdown and weaker demand, we see strong fundamentals driving long-term growth – namely, Southeast Asia’s proximity to China, physical landmass, and access to considerable natural resources. Recovery in China offers an anchor to neighbouring economies, providing ballast to growth – particularly important this year, with global growth slowing down.

Three areas in particular – manufacturing, renewable energy, and smart and digital technologies – represent key growth engines and may benefit more broadly as the region develops.

Asia’s new manufacturing hub?

Companies are increasingly looking towards Southeast Asia as an alternative to Chinese supply chains and manufacturing. Factors driving this shift include China’s rising labour costs – which have doubled between 2013 and 2022⁴ – and recent supply chain disruptions, encouraging corporations to seek greater resilience by expanding their manufacturing footprint.

Meanwhile, broader geopolitical pressures, including sustained US-China trade tensions, are helping reconfigure global supply chains in the region’s favour – one estimate suggests new trade volumes could amount to $1trn through 2031.⁵

The region is set to benefit as companies increasingly seek to expand their operations away from a wholesale reliance on China, in a so-called ‘China Plus One’ strategy. Southeast Asia offers strong manufacturing capabilities, global trade connectivity and low-cost structures – and sits at the heart of two major free trade areas.

Capitalising on this global shift could generate up to $600bn each year by 2030 from added manufacturing output,⁶ while simultaneously boosting broader economic growth through job creation, export revenues and industrial development.

The drive to enhance Southeast Asia’s productive capacity and expand its position in global value chains represents various opportunities for investors – with the region’s share of global foreign direct investment inflows already having risen from a pre-pandemic annual average of 7% between 2011 and 2017, to 12% in 2020 to 2021.⁷

Providing the region continues or increases its uptake of advanced manufacturing and ‘Industry 4.0’ systems to remain competitive, this could help drive meaningful investments in robotics and automation – particularly next-generation robotics, cloud computing and advanced logistics services.

Though Southeast Asia does not yet rival China’s supplier networks or production capabilities, it does offer an alternative in certain parts of value chains. And while the region may be a long way from fully realising its manufacturing potential – needing more efficient regional supply chains and infrastructure – efforts have already begun in countries like Singapore, Malaysia, and Vietnam, with industry roadmaps and strategic plans.⁸

A future backbone of the energy transition

Southeast Asia’s growing energy consumption, driven by its rapid economic growth and expanding population, offers significant investment potential in the renewable energy industry. As the world’s fourth-largest energy consumer,⁹ and against the backdrop of rising global temperatures and energy costs, there is already a strong impetus to ramp up renewable energy use in the region – backed by a supportive policy environment and wider global momentum.

Though renewable energy generation in Southeast Asia has already more than doubled between 2000 and 2020,¹⁰ fossil fuels still constitute most of its energy mix. Approximately $210bn in annual investment will be required to accelerate the region’s energy transition and meet climate targets¹¹ – envisaging a key role for investors in supporting technological innovation and scaling up related infrastructure, such as grids and storage. This is also complemented by wider efforts to de-risk and incentivise green investments in developing markets.

Meanwhile, renewable energy deployment could be central to regional economic development. Southeast Asia is rich in the critical minerals needed to produce clean energy technologies and sits on vast untapped geothermal, wind, solar photovoltaic and hydropower resources – for instance, Indonesia and the Philippines together produce more than half the world’s nickel and sit on almost one-fourth of geothermal generation capacity.¹²

With the necessary value chains, revenues from the region’s production of critical minerals could grow two-and-a-half times by 2050,¹³ while solar and wind energy projects could represent a $30bn opportunity by 2030.¹⁴ Sustainably harnessing these resources could bring opportunities within new domestic value chains and industries, with potential long-term rewards for investors and Southeast Asia’s economies.

Technological transformations backed by strong structural trends

Regional growth and innovation have driven technological transformations across Southeast Asia, creating new markets and opportunities along the way.

Smart or ‘Industry 4.0’ technologies are key to unlocking potential in various of the region’s budding industries – to streamline production, boost innovation and facilitate infrastructure development – and will likely see broader growth as Southeast Asia continues to develop. Meanwhile, socioeconomic shifts and increased connectivity across the region are creating exciting opportunities within fintech and digital healthcare systems.

The region is already known for its robust technology start-up ecosystem – with the number of start-ups across Southeast Asia that have raised more than $1m in funding almost tripling between 2015 and 2021.¹⁵

These transformations have also created an active investment landscape around ecommerce as well as the digital economy more broadly. While the region’s strong digitalisation, marked by high smartphone use and social media penetration, has long been in progress, the pandemic greatly boosted regional ecommerce. Presently, the Philippines and Malaysia are enjoying the strongest online retail growth worldwide, expanding each year by some 25% and 23% respectively.¹⁶

In the region as a whole, ecommerce sales grew fivefold between 2016 and 2021,¹⁷ with the market potentially tripling in size by 2026¹⁸ – presenting a wave of potential investment opportunities across the digital economy ecosystem from the entire logistics value chain, to digital payment services and manufacturing.

There are still challenges surrounding the region’s digital infrastructure and related skills base; however, we see immense potential within Southeast Asia’s technological landscape – with several countries already adopting strategies to capitalise on this rapid digitalisation.

Tapping into the long-term growth potential

Southeast Asia’s appeal to investors is founded on strong structural trends and diversified across areas like manufacturing, renewable energy, and smart and digital technologies. As the region continues to develop, the investment potential in a variety of sectors is considerable.

However, the disparities between Southeast Asian countries are worth noting; they have varying economic prospects, regulatory environments, and structural capacities. In the short term as well, the entire region remains subject to fragile global financial conditions and the progress of China’s reopening after COVID-19.

Nevertheless, investors will play a key role in unlocking Southeast Asia’s full growth potential, with the need for strategic investment and innovation that can help capitalise on the unique opportunities the region offers. Complemented by increased regional integration and policy support, this may in turn achieve broader inclusive growth and lead to potential long-term returns.