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Welcome to Thoughts on the Market. I'm Chetan Aiya, Morgan Stanley's chief Asia economist. Today, why Asia is headed towards its strongest industrial cycle since the mid 2000s. It's Tuesday, May 26th at 2pm in Hong Kong. The market narrative in Asia has been narrowly, almost exclusively focused on artificial intelligence. But AI is just one aspect of a much broader shift across the region. We think Asia is entering an industrial super cycle. And this is being driven by a sustained rise in capital expenditures across AI, energy, defense and broader industrial sector. The numbers behind this are substantial. We forecast Asia's total investment could rise from about 11 trillion today to $16 trillion by 2030. So this implies a 7% annual growth rate over the next five years, which is triple the pace of the past two years, making it quite significant. And for the high growth sectors such as AI, energy, defense and broader industrial sector, we expect CAPEX to grow at an even faster run rate of about 16% a year. Now, let's talk about the drivers. No doubt the first big driver behind this momentum is AI AI. Asia needs to invest more in AI infrastructure. At the same time, Asian chip makers and memory producers are lifting capex to meet demand of US hyperscalers for building data centers. The second driver is energy. Asia needs to invest in the energy sector for three reasons for powering AI energy transition and energy security. The power demand for AI compute is growing exponentially. On top of that, economies are having to shift towards renewables and that needs more investment in grids, storage and power equipment generation. Moreover, the recent geopolitical tensions have made energy security a bigger policy priority, especially for Asia, which is dependent on imported energy. The third driver is defense. Now, even before the recent escalation in the Middle east, defense budgets across Asia were moving higher. This year, China has planned their defense spending to grow at a pace faster than its GDP growth. Meanwhile, India has raised budget reallocations for defense capex by 18% this year. At the same time, Japan, Korea and Taiwan are aiming to lift their combined defense spending from about 1.7% of GDP 3%. The fourth driver is broader industrial sector investment. Every economy in the region is working to secure their supply chains and focus more on onshoring of critical inputs for their domestic industrial production. So what does this mean for Asia? The region stands to reap the benefits of a rise in CAPEX twice over. First, the increase in Asia's CAPEX will fuel its industrial cycle. Second, you have to consider Asia is the world's production house. And as rest of the world is increasing capex in the areas I identified earlier, Asia benefits from feeding this global demand. Already the evidence of a strong industrial cycle is visible. We prefer to look at capital goods imports as a proxy for CapEx and that has been growing at an impressive rate of 27% on a year over year basis. In in dollar terms, industrial production is nearing a four year high and non tech exports, which are important from industrial production perspective, have staged a strong recovery since the fourth quarter of last year. So which Asian economies will benefit as such? All of them, but China, Japan, Korea and Taiwan are the biggest beneficiaries because they are meeting both domestic and export demands. On the other hand, India's industrial sector benefits primarily from its own domestic Capex cycle. The pickup in Asia's industrial production is pushing industrial commodity prices higher, helping Australia and Indonesia, the two biggest commodity exporters in the region. This next chapter of Asia's growth story will filter through from CAPEX to jobs and income growth and then through to the consumer. That's why this is not just an AI story, it will become a broader economic recovery across the region. Thanks for listening. If you enjoy the show, please leave us A Review Wherever you listen and share thoughts on the market with a friend or a colleague today.
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