Where to find value in Asian equities
Charles Bond, a fund manager on the Invesco Asian equity team, talks to us about the outlook...
Asia is a fascinating place in which to invest. It’s home to hundreds of outstanding companies in some of the world’s fastest-growing countries.
This means an impressive investment horizon of stocks in countries such as China, Korea, Singapore, India, Australia, Thailand, and the Philippines.
The region is also home to a dizzying array of technology companies, car manufacturers, retailers, health care businesses, and financial services companies.
Here, we look at the main reasons why investors should be exposed to this area of the world.
Asia is home to 60% of the world’s population (4.5 billion people)* and, with more and more people being lifted out of poverty, income levels across Asia are increasing and the middle class is growing and spending more.
The region is also at the forefront of the digital revolution and, according to Tahsin Saadi Sedik, senior economist in the International Monetary Fund’s Asia and Pacific Department, its companies “are exploiting recent advances in artificial intelligence (AI), robotics, cryptography and Big Data that promise to reshape the global economy and fundamentally alter the way we live and work, in the same way that the steam engine and electricity did in centuries past.”
According to Fidelity, COVID-19 has also accelerated trends already developing across supply chains. “In the short term, as trade and economic activity in the region recovers from its nadir earlier in the year, intra-Asian trade – which for most economies in Asia already represents most of their exports and imports – is accelerating,” it said.
“As industries and governments factor in the learnings of the pandemic, proximity will increasingly feature as a factor to overcome the friction of travel and transport in supply chains.
“Over the long term, we believe the disruption of supply chains during the COVID-19 pandemic, along with geopolitical tensions, will drive a more regional approach to trade. We expect to see the rise of regional economic centres where growing demand from large economies such as China or India fuel growth in other developing countries nearby. This shift in supply chains will benefit countries in Asia with large domestic economies, large neighbouring economies and rising middle classes.
Despite their superior growth potential, Asian assets remain under-represented in investor portfolios.
While there is currently £36bn invested in funds within the IA Asia Pacific excluding Japan sector**, it is only the 12th most popular out of almost 50 sectors. And the sums invested pale into comparison to the IA Global sector which has £169.3bn and the £161.5bn in IA UK All Companies sector.
Asian companies are also under-represented in global equity indices. In the MSCI AC Asia (ex-Japan) Index, Asian stocks (excluding Japan) make up just 10.3% of the index***.
“When you consider that indices like this are used as benchmarks, many investors can expect to be underweight in their allocation to Asian equities,” said Fidelity.
For those not wanting to miss out on the opportunities available in Asia, here are five Elite Rated fund options.
This fund’s manager, William Lam, seeks companies whose share prices are substantially below Invesco’s estimate of fair value. “Our search for undervaluation leads us to look for new ideas in unloved areas of the market,” he said. William also has a clear preference for cash-generative companies with strong balance sheets, as these attributes suggest sustainable business models and conservative management.
Hong Kong-based Joanna Kwok and Mark Davids have been running this fund together since its revamp in 2015. They will invest in the shares of up to 60 companies of any size, primarily focusing on quality, growing businesses to generate superior capital gains than their peers and the wider market. “Despite all the noise in markets, the story around growth in Asia continues to centre around 4.5 billion people who live, work and consume in this fast-moving, exciting region,” said Joanna.
Managers Sharat Shroff and Inbok Song favour holdings that are capable of sustainable growth, based on a number of key fundamental characteristics. These include balance sheet information, number of employees, size and stability of cash flow, management’s depth, adaptability and integrity, and product lines. The managers currently believe the outlook is encouraging despite the challenges testing consumers and companies, such as higher energy prices.
Anthony Srom takes a high conviction approach to his management of this fund, with the intention of ensuring each stock contributes to performance in a meaningful way. While the portfolio’s style is broadly neutral, fresh portfolio ideas can provide a contrarian view. Company fundamentals, market sentiment and current valuations are the three key factors for portfolio construction.
Managed by Richard Sennitt and assistant Abbas Barkhordar, this fund adopts a flexible approach as it looks to exploit stock market inefficiencies. According to the most recent commentary, Richard prefers to take a diversified stance when it comes to portfolio construction, particularly given China’s recent struggles with Covid-19. “We retain exposure to select financials, while we have also been very gradually increasing exposure to some of the better-quality growth stocks in the region,” he wrote^.
*Source: Investment Association, April 2022
**Source: Fidelity, March 2022, worldometers.info/population/countries-in-asia-by-population
***Source: Fidelity, MSCI All Worlds Index, 29 January 2021
^Source: Schroders, April 2022