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Undiscovered Asia

This is the fifth year in a row where equity markets have risen and the seventh year where Asian equity markets have outperformed. This might sound warning bells for some investors but we believe that every stockmarket cycle is different. It would take a brave investor to try to use the duration of market strength to try to time market peaks and we do not believe that the evidence justifies it.

Not only are we still not near the peak, in our view, but to judge from the growth, liquidity and valuation measures we look at, we are just at the start of a multi-year bull cycle. Strong growth in consumer spending and investment growth are turning Asia into one of the main drivers of economic growth around the world.

Many investors have chosen to take exposure to the region by investing in Hong Kong and China.

China has turned itself into the world’s favourite manufacturing centre while rising Chinese income levels have boosted demand for housing, luxury goods and services.

Yet, although the investment case for Hong Kong and China is strong, these markets have seen considerable inflows of capital and are no longer as attractively valued as they once were.

That is particularly the case for the A-share market in China, which has performed exceptionally well. For investors looking to retain exposure to the China theme but add a little more diversification to their portfolios, we believe investors should seek out “undiscovered Asia”.

For one thing, most of these markets are at much lower share price valuation levels than the markets in Hong Kong and China. Yet, many of the firms there are still benefiting from the same trends as companies in China, either directly by exporting goods or providing services to China or indirectly by benefiting from rising living standards or trade volumes.

Rapidly increasing global demand has been a supporting factor for many of the other regional markets, too. Korean companies have seen a surge in orders for oil tankers from countries in the Middle East while Malaysian building companies have seen a jump in orders from all round the region. Property companies in Singapore have benefited from a sharp increase in demand for office space in Singapore.

For confident investors, it is possible to take part in the broader Asian story by investing in one or more single-country funds. While these obviously lack the degree of country diversification which can be found in regional funds, they do give focused exposure to devel-opments in an individual market and can prove very rewarding, although not perhaps for nervous investors.

In the interests of full disclosure, we manage a single-country Korea fund, for example, while it is possible to find funds from well known managers which invest in other markets in the region such as Singapore, Taiwan and the Philippines.

For other investors, knowing where to invest for the most attractive opportunities in such a diverse region is not always so easy. The attractions of individual markets come and go and it can take an investor with a degree of expertise and knowledge of the region to take full advantage of the major investment themes and opportunities on offer.

A regional Asian fund can be an attractive option here, where the manager selects his or her best investment ideas at any given time and constructs a portfolio around them. For investors who already have exposure to Hong Kong and China, this can offer a welcome degree of diversification although it is worthwhile checking how much exposure the regional fund still has to these markets if an effective degree of diversification is to be achieved.

Finally, for those looking for something a little different, it is possible to find funds which invest in some of the emerging markets in the region such as Vietnam.

Not for the faint-hearted, many of these economies are at a fairly early stage of development, with high political risk and low market liquidity. Yet the benefits of investing in these markets at this early stage can be rewarding if you are prepared to include a little bit of undiscovered Asia in your investment portfolio.

Ian Pascal is marketing director at Baring Asset Management

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