Market Perspectives: How Can RCEP Benefit Investments in Asia? | Fund managers
As part of renewed efforts to establish regional trade relations, the world’s largest free trade pact, the Regional Comprehensive Economic Partnership (RCEP), entered into force on the first day of 2022 between 15 Asian countries.
Member States include China, Japan, South Korea, Australia, New Zealand and 10 members of the Association of Southeast Asian Nations (Asean).
RCEP represents a third of the world’s population and 30% of the world’s gross domestic product (GDP). Members plan to eliminate tariffs on 92% of products over the next decade. The pact also means greater market transparency, support for foreign investment and improved regional supply chains.
Since the trade deal can help China move its supply chain to ASEAN countries for lower cost bases, the latter is seen as a big beneficiary. RCEP also provides a favorable environment for the e-commerce and industrial production sectors, among others.
This week, AsianInvestor asked fund managers how RCEP could benefit investments in Asia.
The following answers have been edited for brevity and clarity.
Elliot Hentov, Policy Research Manager, Global Macro Team
State Street Global Advisors
In theory, trade integration does not require the integration of investment, but in practice it does. Deeper trade relations through a trade agreement first increase trade flows and then promote foreign direct investment (FDI). Basically, this is where investment opportunities develop and remain the most attractive.
The trade deal such as RCEP suddenly improves margins and market access so that the market capitalization of participating companies increases. This effect is most pronounced among private firms, but the macro-dynamics supporting exporters and importers also apply to state-owned firms, albeit to a lesser extent.
We believe that the biggest beneficiaries of RCEP will be Northeast Asian exporters, especially Japan and South Korea, which had not benefited from free trade agreements between themselves as well as with the United States. China. In addition, Southeast Asian producers are likely to benefit from regional trade integration and increased Japanese and Korean FDI receipts. Investment alpha can be generated by identifying Southeast Asian companies that could become regional champions now that they have a larger regional market to expand into.
Louis Luo, Investment Director, Multi-Asset Investment Solutions
The Asian Development Bank has estimated that RCEP will increase members’ real GDP by a modest 0.4% through 2030. We believe it will catalyze investment opportunities in multiple areas.
Although ASEAN countries benefit from low tariffs under bilateral free trade agreements, RCEP will further reduce them and boost regional trade. One of the first beneficiaries could be the agricultural sector of Asean, which should benefit from a tariff reduction of up to 60% on exports to Japan, for example.
RCEP’s single-origin rule framework treats all members equally, encouraging the development of a low-cost manufacturing base in ASEAN countries. An enlarged manufacturing base increases manufacturing jobs and stimulates income growth and urbanization, creating opportunities in the consumer sectors. Lower tariffs on industrial products also mean lower production costs, which should benefit the machinery, equipment and industrial real estate segments.
In addition, RCEP establishes a regulatory framework covering areas such as personal and cross-border data. This should provide opportunities to invest in emerging e-commerce and internet companies in the region, underscoring their advantage over Chinese tech companies facing increased regulatory oversight.
Finally, the economic benefits of RCEP are good news for banks in the region. We expect that increased trade and investment flows will stimulate demand for financial services. Singapore can be a notable beneficiary, given its strength in this sector.
William Yuen, Chief Investment Officer
We believe that Asia-Pacific countries will benefit from RCEP at different levels. China will be able to strengthen its trade and investment ties with other economies in order to maintain its leadership position in global supply chains. In the rest of Northeast Asia, Japan and South Korea are expected to integrate their high-tech production platforms with China’s push for a digital, cloud-based, and cloud-based economy. on AI.
The Japanese auto industry will benefit from Chinese household demand for vehicles. In addition, the Asean economies will benefit from the significant shift of the textile and clothing industries out of China to their lower cost bases. Singapore will gain from supplying China with chemicals and petroleum products, while Vietnam focuses more on electronics and machinery.
In terms of sector, the partnership recognizes the increasing digitization of commerce and aims to promote e-commerce between RCEP parties. It facilitates paperless commerce, electronic authentication / signatures, online consumer protection, etc. Amid the pandemic, the pact provides a supportive digital business environment for businesses and consumers in the region.
Consumers will benefit from a greater selection of products and a potential drop in selling prices between parties to RCEP. This will give the retail sector a big boost.
Dong Chen, Head of Macroeconomic Research in Asia
Pictet Wealth Management
One of the main features of RCEP is the high degree of diversity among member countries, which include some of the world’s most advanced economies (Japan, Australia, New Zealand) and some low-income countries (e.g. Cambodia, Laos and Myanmar). This would allow the division of labor so that different countries can play on their comparative advantages.
The gradual elimination of tariff and non-tariff barriers will also facilitate the reconfiguration of supply chains in the region. On that front, Southeast Asia is likely to benefit the most, as more labor-intensive industries leave China, where production costs are rising.
Changes in supply chains in the region are not necessarily negative for China. The typical “China + 1” practice by multinational enterprises to diversify their production facilities to a certain extent has strengthened economic ties between China and other regional economies. RCEP will likely strengthen these ties rather than weaken them.
Sukumar Rajah, Director of Portfolio Management
Emerging Markets Equities Franklin Templeton
Beyond the proposed tariff cuts, we are keeping an eye on the state of non-tariff barriers. Less developed ASEAN countries could see their imports increase and their exports reduced due to RCEP, as it will be difficult for them to develop manufacturing capacity or knowledge to compete with larger countries, like China. As the Covid-19 pandemic continues to restrict global economic growth, this new partnership aims to boost growth.