How to navigate investing in Asia

The Asia Pacific region is home to some of the world’s fastest-growing economies. In 2024, it is projected to grow at nearly six times the rate of Europe*. However, this region is not homogeneous; there is considerable variation in economic performance and stock market returns among different countries. For example, over the past year, China’s stock market has struggled, while India’s has thrived. This means that investing in Asia offers a range of opportunities and challenges.

Recent performance in the Asia Pacific region

The MSCI AC Asia Pacific ex Japan index has delivered 9.4% return year to date, compared with a 12.7% return for the MSCI World index**. However, investor experiences have varied greatly depending on where their managers allocated funds. China, which constitutes 24.1%** of the MSCI AC Asia Pacific ex Japan index, has seen a modest increase of 5.6%***, while India, making up 18.4%** of the index, has experienced a 17.8% increase***.

Between the two giants, China and India, are the semiconductor powerhouses of Taiwan and South Korea. Companies like TSMC and Samsung Electronics, which together represent 13% of the MSCI AC Asia Pacific ex Japan index**, have a significant impact on Asian markets. Additionally, the region includes emerging markets such as Thailand, Indonesia, and the Philippines, which present higher risks but also potentially higher returns.

The performance disparity among funds in the IA Asia Pacific ex Japan sector is notable. The worst-performing fund is down 2.3%, while the best-performing one is up 22.2% year to date****. Generally, the top-performing funds have avoided China, focusing instead on India and key technology sectors like semiconductors.

Four clear investment approaches to the region

Conservative approach: Jupiter Asian Income

One example is the Jupiter Asian Income fund, managed by Jason Pidcock, which has consistently performed well. Jason has avoided Chinese investments due to geopolitical risks, likening it to investing in Russia or North Korea. Instead, he focuses on countries like Australia, Taiwan, India, and Singapore, emphasising markets that have outperformed China. The fund’s income mandate also provides a defensive buffer.

Growth-oriented approach: Schroder Asian Alpha Plus

For investors seeking growth, the Schroder Asian Alpha Plus fund, managed by Richard Sennitt, offers a different strategy. Although the fund holds some positions in China, it is underweight in the region and focuses more on Hong Kong-listed stocks^, where valuations are lower and management teams prioritise shareholder returns. Richard is cautious about valuations, particularly in India’s mid/small-cap segments, but sees long-term potential in private sector banks and IT services stocks.

Sustainable approach: Stewart Investors Asia Pacific Leaders Sustainability

Sustainable investing is another approach, exemplified by the Stewart Investors Asia Pacific Leaders Sustainability fund. Managed by David Gait and Sashi Reddy, this fund invests in 30 to 60 high-quality businesses across Asia that are contributing to a sustainable future. The managers engage with companies to improve performance and avoid businesses linked to harmful activities like fossil fuels and nuclear energy. The fund’s portfolio includes familiar names in Samsung and TSMC but also less household names such as Mahindra & Mahindra^^, one of the largest vehicle manufacturers by production in India. Healthcare is also a significant overweight sector in the fund (20.5% versus 4.4%)^^.

Contrarian approach: Federated Hermes Asia ex-Japan Equity

Federated Hermes Asia ex-Japan Equity is a concentrated fund investing in emerging markets within the Asia ex-Japan region. Its manager is willing to buy all types of companies if the price is right. He actively invests in stocks that are currently out of favour but which he believes are likely to perform better in the future. The contrarian philosophy makes it refreshingly different to many of its peers. The process has historically worked very well, with the fund delivering 115.5% for investors over the past decade, compared with 102% for the average fund in the sector^^^. The fund is currently underweight both Taiwan and India, while overweight to Korea^^.

Technology and Emerging Markets

Asia also boasts exciting technology opportunities, often with growth potential similar to their US counterparts but at lower valuations. William Lam, manager of the Invesco Asian fund, notes that the demand for AI-related semiconductors is not yet fully priced into some major Asian tech stocks, suggesting room for growth. The fund’s largest holding is TSMC (9.4%)^^ with the largest country allocation to China (26.8%), followed by Taiwan and South Korea at 15.1% and 13.6% respectively^^.

In addition to technology, emerging markets like Vietnam and Indonesia are on promising growth trajectories. Vietnam benefits from shifting global supply chains, and Indonesia has experienced an economic resurgence. The T. Rowe Price Asian Opportunities fund, for instance, has over 9% invested in smaller markets such as Vietnam, Indonesia, and Philippines, allowing it to capitalise on their growth^^.

Conclusion

Asia’s growth prospects are exciting, offering a variety of investment approaches. From a steady, conservative strategy focusing on developed markets, to more aggressive growth options centred on emerging markets and technological advancements, investors have numerous choices. Deciding which strategy aligns with your investment goals and risk tolerance is crucial. But, one thing is clear: there’s more to Asia than simply exposure to China.

*Source: World Economic Outlook Updated, January 2024

**Source: MSCI index factsheet in pounds sterling, 28 June 2024

***Source: FE Analytics, total returns in pounds sterling, 1 January 2024 to 28 June 2024

****Source: FE Analytics, discrete calendar performance, 2024

^Source: fund factsheet, 30 April 2024

^^Source: fund factsheet, 31 May 2024

^^^Source: FE Analytics, total returns in pounds sterling, 16 July 2014 to 16 July 2024