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Elliot Farley: Eastern opportunities and a tactical financials play

With much of the developed West dragging along in the economic doldrums, the nations of emerging Asia continue to offer significant Eastern promise for investors.

We were early converts to the long-term investment case for emerging markets and the Asia Pacific region and our enthusiasm has not dimmed.

Within this region there has been much talk about China’s slowdown. The truth is double-digit GDP growth cannot continue year after year and neither was that part of the nation’s plan. However, even more moderate single-digit annual growth rates, such as the recently published 7.4 per cent annual rate for Q3 2012, remain highly attractive compared with Western economies going through a lengthy and painful period of deleveraging.

For many years growth in China has been led by high levels of investment. This has been at the expense of private consumption. However, given the huge amount of capacity built to date, can infrastructure spending continue at the same rate? The answer is almost certainly not and this has been recognised by Beijing, which is working to shift the economic model to one more inclusive and consumer-driven.

So the emerging Asia story continues to look convincing but, as the path of growth evolves, the time comes to look at new ways to play it.

Perhaps the more traditional approach has been to allocate directly to the region through emerging market and Asia Pacific funds. But changing times call for new approaches and one alternative is to invest in Western companies expanding into the area.

These typically have the established brands, expertise and experience to provide the goods and services increasingly in demand by consumers as their incomes grow. Being based in the West, where interest rates are at historic lows, many can also take the opportunity to invest in new markets in the faster-growing East.

One such area that has proven interesting to us recently is financials. Sentiment has been against the sector for some time given the obvious problems in the West. However, attractive growth opportunities exist as individual wealth in Asia grows. A thematic financials fund with a global remit has the opportunity to identify companies well placed to capitalise on growing demand for financial products in emerging Asia.

The region’s banking sector is still developing but increasing wealth – Asia already has more millionaires than North America – will inevitably drive rising demand for products such as long-term savings vehicles and insurance, creating valuable new markets for financial services companies.

In addition to this long-term story of growing Asian demand we see tactical potential for a specialist financials fund manager to deliver growth from pockets of opportunity in the US.

On both sides of the Atlantic, banks have been at the eye of the storm and bankers – particularly those of the investment variety – have been pilloried by politicians, the public and the press, all of which has taken a toll on the financial sector. But if you look a little more widely there are clear opportunities – with the recovery in the US closer to becoming self-sustaining and a housing market gathering momentum, the outlook for many of North America’s banks looks more interesting.

Financials may be out of favour with investors but we think there is a strong argument for an allocation to this unloved sector through a thematic fund with a manager who has the experience and expertise to seize the longer-term growth and shorter-term tactical opportunities that shine through.

Elliot Farley is co-manager of the T. Bailey Growth Fund


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