Why Japan’s problems could be solutions for investors
For three decades Japan has experienced bouts of deflation and persistent weak growth. And, on the...
With many of its countries now coming out of lockdown and with Western economies struggling to come to terms with the long-term impact of the coronavirus, could the case for investing in Asia be reaching a tipping point?
We take a look at four reasons why investors may want to consider the region.
Asia has always been a hotbed for investors looking for growth and who can blame them? The region is expected to account for 60%* of global GDP (the total value of all of the goods made, and services provided, during a specific period of time) in 2030 and be responsible for 88%** of new members to the middle-class by the same date.
Despite the impact of the pandemic, the International Monetary Fund says emerging and developing Asia will grow by 1% in 2020, this compares to a contraction of 6.1% in advanced economies***. Asia is then expected to grow by 8.5% in 2021 (vs. 4.5% for advanced economies)***.
Those looking for an experienced manager in this asset class may like the Schroder Asian Alpha Plus fund, managed by Matthew Dobbs. Matthew adopts a completely unconstrained approach to stock selection to maximise capital growth, investing in companies all over the region.
China is the epicentre of all things Asia, as it establishes itself as the heir apparent to the US as the world’s largest economy. It has also been aided by specialist policies, such as ‘one belt, one road’ and the liberalisation of its financial markets. The decision by the MSCI to increase its weighting and breadth of China A-shares exposure in its emerging markets index, as well as its China index and other regional indices, also represents a significant opportunity.
India is likely to see a multi-decade low in terms of growth this year (in April the IMF predicted 1.9% in 2020 – down from 5.8% in January due to the recession)***. However, it is expected to grow by 7.4% in 2021*** and has made numerous strides under prime minister Narendra Modi since 2014 – such as the Goods and Services Tax, inflation targeting and the implementation of its bankruptcy code. It’s also another country looking to take advantage of trade wars, by offering new manufacturing companies a tax cut from 25% to 15%.
What will help both economies is the fall in the oil price. China and India are the first and third largest importers of oil globally. For every $10 per barrel fall in prices, India saves more than 1 trillion rupees ($130 billion), which is equivalent to 0.5% of GDP^.
As Asia has grown and its populations have become richer, its citizens have witnessed what wealth creation can do for living standards. Scientists, business leaders and politicians alike can also see the value of true innovation—giving rise to the region’s own brands, intellectual property and market structures.
This has seen a spike not only in healthcare and technology investing, but also in the way countries initiate reform programmes, such as India’s discussed above.
As Matthews Asia highlighted in a recent research document: “Banks in India, looking to serve millions in rural areas, are skipping brick-and-mortar local branches in favour of smartphones. South Korea is doubling down on research & development spending to boost its battery cell and semiconductor businesses. Researchers in China are also mapping genomes of entire populations to expedite cancer research and drug development.”
Those who believe in the Asia technology story, may like to consider the Invesco Asian fund, where fund manager William Lam has an overweight to tech stocks (23.5%)^^.
Matthews Pacific Tiger is tapping into the consumer story with one-third of its holdings related to this sector (vs 20% for the benchmark)^^. And in a slightly different play on the same theme, Eric Moffett, manager of T. Rowe Price Asian Opportunities Equity, told us why he is focusing on the working-class consumer, “not the folk buying Louis Vuitton bags” in his recent podcast
By thinking of Asia solely in terms of its growth potential, investors may be missing out on the income opportunity in the region. For example, did you know that two-thirds of total returns^^^ in the region have historically come from dividends – dividends that many managers believe are more resilient than those in other regions of the world in the current climate.
There have also been numerous attempts by various governments in Asia to cultivate a better environment for dividend pay-outs in the past decade. Examples include the Shanghai Stock Exchange encouraging companies to pay more than 30% of profits as dividends in 2013; Korea introducing a penalty tax on excess capital holdings to promote higher dividends in 2014; and the Securities and Exchange Board of India making dividend policies mandatory for the top 500 listed companies in 2016*^.
It makes it an attractive alternative for investors looking to diversify at a time when dividend cuts will be rife in the UK and other parts of the developed world in 2020.
Those looking to tap into the Asia income story may like the Guinness Asian Equity Income fund which invests in 36 companies, all of which have an equal weighting in the portfolio. Managers Edmund Harriss and Mark Hammonds say this, together with their one-in, one-out policy, means each stock can make a meaningful contribution to performance.
*Source: World Economic Forum, 2019
**Source: European Commission, Foresight: Growing Consumerism
***Source: IMF World Economic Outlook April 2020: The Great Lockdown
^Source: Schroders: What does Covid-19 mean for India
^^Source: Fund factsheet at 30 April 2020
^^^Source: Schroders: Rate cuts push case for Asian dividend
*^Source: JPM, Merrill Lynch