Diversification is not a buzzword – it’s a necessity
Investing is often likened to a journey, with the destination being financial success. Along this...
Asia is the world’s largest continent. It is home to 48 different countries and more than 4.5 billion people. It also embraces some of the world’s fastest growing stock markets and companies and has become a core region in which to invest.
Asia is no longer just a producer of goods for the Western consumer. Its own booming middle class is fueling strong domestic consumption. Across the Asia Pacific region, there will be over 210 million additional middle-income households by 2035 compared to 2020*. With money to spend, this creates opportunities for both companies and investors. This includes an increasing take up of everyday consumer staples, as well as healthcare products and financial services.
Truthfully, there’s some overlap. Asia comprises both developed markets such as Singapore and Hong Kong and developing markets such as India and Vietnam. Developing or emerging markets are those transitioning from a low income, less developed, often pre-industrial economies towards a modern, industrial economy.
Being such a large region, it’s perhaps no surprise that Asian companies make up a large part of the MSCI Emerging Markets Index, and many actively managed emerging markets funds invest quite a bit in these areas. For example, more than half of the GQG Partners Emerging Markets Equity fund is currently invested in Asia, including 22%** in India and 17% in China**.
Typically, when we discuss Asian equities, we are excluding Japanese equities. Why? Well, it dates back to the 1980s and 1990s, when Japan was a very dominant player in Asia and the size of its stock market and economy was far bigger than any of its peers. As a result, people wanted to invest in Japan as a separate entity.
Baillie Gifford has a highly regarded Japanese equities team and has following Japanese products Rated by FundCalibre: Baillie Gifford Japan Trust, Baillie Gifford Japanese, Baillie Gifford Japanese Income Growth and Baillie Gifford Shin Nippon.
Today there is an argument that as China has become such a dominant force in Asia, it now also dominates markets and therefore investors should consider ‘Asia ex China’. Dale Nicholls, manager of Fidelity China Special Situations, first told us about this in 2019:
Although some funds have a natural overlap, it’s possible to limit your exposure to China. You can find some generalist Asian equity funds that are currently underweight China, Jupiter Asian Income has just 1.4%** invested in Chinese equities, for example.
In fact, some of the most popular opportunities in the area come from outside of Mainland China. South Korea and Taiwan are two of the largest semiconductor players in the industry, for example. India also has a strong population growth story that is benefitting areas such as infrastructure and the industrialisation of the economy. Greater financial inclusion and female participation in labour forces can also help to boost the region further in the coming years.
The less developed nature of these markets presents greater risks for investors. Investing in Asian (and emerging markets) can be more volatile compared with developed ones. That’s why a long-term outlook of at least five years is key, although longer is better.
Long-term growth in Asia is an important component of the opportunities in the region. The JPM Asia Growth fund is a high conviction and concentrated fund, primarily focused on finding high quality, growing companies.
T. Rowe Price Asian Opportunities fund operates a ‘safety first’ approach which can offer new investors peace of mind in a more volatile market. The manager’s ‘tortoise versus hare’ style of investing makes this an option for a core Asian holding. The Ninety One Asia Pacific Franchise looks for exceptional businesses through detailed fundamental research.
Those looking for income in the region might consider the Schroder Asian Income fund. It invests in the whole Asia Pacific region, including Australia and New Zealand, but excluding Japan. Another option for income is the Matthews Asia ex Japan Dividend fund which blends stocks exhibiting dividend growth with more stable, established yielders.
*Source: Oxford economics
**Source: fund factsheet, May 2022