Regionalisation: Asia’s investment appeal in a many-systems world

With the Strait of Hormuz reopened (for now), positive business conditions are returning. Yet the conflict provided a fresh reminder of the vulnerability of global supply chains and their direct impact on global markets. Beneath the surface, geopolitical tensions are reshaping the globalised economy through a stark process: regionalisation. 

What is regionalisation?

International trade has been an evolving force since British economist David Ricardo developed his theory of comparative advantage in the early 19th century. A new openness to trade after the Second World War led to increasing fragmentation of production and the development of a global value chain, with business models evolving towards zero inventory and just-in-time delivery for maximum efficiency by the 1980s. Globalisation arguably peaked just before the 2008 financial crisis, when world trade represented close to 30% of global GDP (see Figure 1 below).

FIG 1. World trade as a percentage of world GDP, 1960-2025¹

Since the financial crash, however, world trade as a percentage of GDP has plateaued. Under the surface, a series of market shocks have forced businesses to adapt and secure their supply chains. At the same time, geopolitical tensions have pushed governments to assess and manage their strategic dependencies.

What initially appeared to be a temporary adjustment is now evolving into a much broader realignment that prioritises resilience over theoretical efficiency. This is not the end of globalisation, but rather a structural shift in the global economy towards a more selective and regionalised model.

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What’s driving regionalisation?

A more volatile and uncertain world has increased the tension between markets’ innate tendency towards efficiency and a growing need for resilience. While globalisation is a highly efficient economic regime, it is also highly vulnerable to disruption. 

As soon as one major country steps away from an open-market model, its value for other countries is eroded. The 2018 US-China trade war started a process of retrenchment, which has accelerated as the pandemic, the war in Ukraine and most recently the Middle East conflict have delivered further market shocks.

What are the key features of regionalisation?

The new global environment has highlighted the vulnerability of countries to four key dependencies:

• Raw materials: critical inputs, energy and resources
• Technology: critical hardware, software and intellectual property
• Defence: effective military and national security capabilities
• Value chains: key industrial capabilities.

To address these dependencies, countries and businesses have moved towards a new economic model characterised by eight prevalent behaviours:

• Friend-shoring: working with trusted partners
• Near-shoring: producing goods closer to home markets
• Reshoring: bringing production back home or producing key goods domestically
• Export controls: restrictions on trading sensitive goods and technologies
• Industrial policy: subsidies, tax credits and strategic support
• Stockpiling: building strategic inventories to counter supply-chain risk
• Supplier diversification: reducing risk by working with multiple suppliers
• Duplication of capacity: building redundant capabilities domestically to reduce risk.

What are the consequences of regionalisation?

Instead of trading with the most efficient partner, regionalisation means countries are increasingly seeking trade relationships that improve the resilience of their supply chains. Regionalisation requires a surge in strategic investment as businesses recreate the production chain in a way that reduces high-risk dependencies. This surge in private investment, against a backdrop of rising public debt, is driving the cost of capital higher. At the same time, higher inventories impact the supply-demand balance, putting upward pressure on prices of industrial metals, fossil fuels, chemicals and even manufactured goods.

What are the implications for investors?

Regionalisation has three key consequences for investment:

• Rising cost of capital: strong capex has a tendency to push real rates higher, especially during a period of high public debt and demographic ageing 
   
• Geographic exposure becomes more important. The explanatory power of economic region over the MSCI All Country World Index (ACWI) Is now higher than at any time since the dotcom bubble (see Figure 2)
   
• Effective sector allocation is proving essential, with sector performance diverging across regions over the past two years (see Figure 2).
   

FIG 2. Explanatory power of geography and sectors over MSCI ACWI performance, 1996-2026²

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How is regionalisation playing out in Asian markets?

A more fragmented geopolitical backdrop and higher oil prices are incentivising greater self-reliance for Asian countries. Sustained investment in energy, security and technology is providing a boost to Asian credit markets. At the same time, the region’s position at the epicentre of structural trends – especially AI – positions it to withstand market shocks and continue to emerge as a key growth engine for the global economy.

Energy

US efforts to block Chinese involvement in oil and gas in the early 2000s led China to pivot towards the electrification of its economy. It is now a world leader in both electric mobility and battery technology, including energy storage to solve renewables intermittency. 

Chinese companies account for more than 60% of global battery production, a market that can expect huge growth as transport and industry electrifies globally and AI data centres drive the need for stable, on-demand energy. Chinese companies lead their competitors on fast-charging, energy density and the commercialisation of next-generation battery technology and applications, including humanoid robots and construction machinery.  

Technology

More recently, the US has controlled exports of advanced semiconductor chips and equipment to China. The Chinese government has reacted by investing heavily in domestic semiconductor production. Although reportedly one-to-two years behind the most advanced technology, Chinese chips are catching up and have the advantage of being far cheaper than equivalents.

Global players like Samsung, SK Hynix, Micron and Kioxia¹ are likely to continue to dominate tech infrastructure and AI applications. However, Chinese firms will be well placed to fill the gaps, particularly in consumer electronics. Major players include CXMT, YMTC and domestic equipment suppliers AMEC and Naura Tech¹. It’s worth noting that Apple¹ has asked the White House to remove CXMT, a producer of DRAM chips, from the US trading blacklist so it can buy its chips.

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Data and security

A further area where the US seeks to exert influence is satellite data – an issue that has been highlighted by control over the use of SpaceX’s¹ Starlink system in the wars in Ukraine and Iran. SpaceX has more than 10,000 low-orbit satellites powering Starlink, which enjoys a 97% share of the global satellite broadband market. It’s likely that India was recently pressured by the US government to allocate spectrum to SpaceX instead of putting it to a more open auction, raising concerns around data sovereignty and control of key communications.

A many-systems world 

Regionalisation means a shift away from the winner-takes-all model that has dominated globalised sectors in recent decades. We are starting to see the creation of a many-systems world in which a wider range of companies have the potential to increase earnings.

We expect Asian companies to succeed in their new localised systems. In this scenario, their potential to further increase profits will strengthen as Western firms face higher barriers to entry for sectors including battery technology, cleantech, EVs and satellite data. At the same time, cheaper input costs and the benefits of regional scale mean Asian firms can be highly competitive in broader, global markets. The result is a fertile environment for Asian credit and equities, in our view.