Should you invest in Asia?

Investors in Asian equities have endured a challenging three years with the Covid-19 pandemic, regulatory action in China, and global interest rate movements.

This has resulted in extreme volatility. Stock markets have plunged and recovered in quick succession, while being constantly vulnerable to political and economic events.

So, what do prospects look like today? Here we look at this intriguing sector and discover where fund managers covering these regions are currently invested.

Sheer terror

All global markets were adversely hit in the early months of 2020 as coronavirus spread with alarming speed and sent the world into turmoil. Lockdowns introduced around the world, fears about how Covid-19 would develop, and uncertainty over the impact on sectors, caused high levels of anxiety.

The depths of the pandemic were certainly a “moment of sheer terror”, according to William Lam, manager of the Invesco Asian fund. “Asian equities bottomed in March 2020, having fallen over 30% between the 19th of February and the 23rd of March,” he wrote in his quarterly update.

Rollercoaster

The months since have been something of a rollercoaster ride for investors, according to William, with stock markets having reacted aggressively to changes in sentiment. “From the bottom, Asian equities rose 90% over the following 11 months, another unusually sharp move, hitting an all-time high in February 2021,” he said.

A combination of factors, including regulatory action in China, changing global interest rate expectations, and a lockdown in China saw these gains eroded in 2021 and 2022.

“The re-opening of China late last year led to a sharp rebound; and at the time of writing, we are in a period of relative calm,” he added. “A few hours of boredom are certainly overdue in markets!”

Where are managers invested?

Asia Pacific has enjoyed a better-than-expected start to the year, but where have fund managers been finding success and are they confident it will continue?

Technology-heavy markets such as South Korea and Taiwan have been the best performers, according to Charlie Dutton, manager of the Ninety One Asia Pacific Franchise fund. In his quarterly update, he noted these areas helped offset weaker quarters from India, Malaysia and Thailand during the first three months of 2023.

“Large technology stocks proved to be something of a safe haven, with the result that the technology sector was the best performing sector,” he added. “Media stocks in China also did well, contributing to a strong performance from the communication services sector.”

Charlie pointed out stock selection in IT had been particularly important, with chip designer NVIDIA delivering a much-improved outlook as it unveiled fourth quarter results that beat estimates. “The company also showcased how its products should benefit from increased demand for artificial intelligence at its annual developer conference in March,” he added.

Information technology has the largest sector allocation of 23.7% in Jihong Min’s T. Rowe Price Asian Opportunities Equity fund, followed by 20.6% in financials and 18.9% in consumer discretionary*. When it comes to country exposure, 42% of the fund is focused on China, with Taiwan, India, South Korea, and Hong Kong among the other exposures*.

“We remain constructive about Asia ex-Japan equities in 2023, given the potential for an earnings recovery in China, reasonable valuations, and a prospective upturn in the technology hardware cycle,” said Jihong. “We are focused on identifying high quality businesses with durable growth engines that are likely to help compound earnings over time.”

Of course, investors wanting more focused exposure to China have several portfolios to consider. One of our favourites is FSSA All China, which is run by Winston Ke and Helen Chen.

Unlike many rival Chinese equity funds, their approach consists of a very wide remit that includes the vast A-share market which is often ignored.

The managers invest in long-term sustainable growth opportunities and particularly embrace the idea of finding high quality businesses and management teams. Tencent Holdings is the fund’s largest individual stock holding at 7.9% currently*.

China Mengniu Dairy Company and JD.com, the Chinese e-commerce business, are the next most significant, accounting for 6.1% and 5% of assets under management, respectively*.

Outlook

So, what happens next? Will Asia ex-Japan be a lucrative place to invest over the coming year or are there still some red flags that shouldn’t be ignored?

No-one has a crystal ball, unfortunately, but how optimistic are economists and fund managers feeling about the coming months?

Ninety-One’s Charlie Dutton believes there are likely to be some challenging months ahead for those investing in Asian markets. “As we move deeper into 2023, the risk of a global recession remains high,” he said. “Although some headline figures have eased, inflation is proving persistent and elevated.”

Alex Holmes, a senior economist at Oxford Economics, also expects the external environment to worsen again in the quarters ahead. “While higher Chinese import demand due to reopening has boosted exports in some neighbouring countries, the impact has been relatively small,” he said. “Meanwhile, monetary tightening in the key export markets of the US and EU is expected to weigh on external demand.”

However, Martin Lau, managing partner of the FSSA Greater China Growth strategy, believes China’s easing of Covid restrictions should enable a return to structural growth in consumption and tourism. “Amid the weak consumer demand over the past two years, we have focused on buying the higher quality franchises and market leaders,” he said.

Martin believes a key to future success is focusing on the quality of the business. He also expects the reopening of China will encourage people to become more active.

“This should benefit Anta, China’s most successful sportswear company, and one of the few Chinese companies that has proven its ability to build and run multiple strong consumer brands,” he added.

*Source: fund factsheet, 31 March 2023

_{Photo by Itai Aarons on Unsplash}