Will Asia benefit from a global reset?

Over the course of the past few weeks, one topic of conversation in particular seems to be gathering momentum: that of a ‘global reset’.

Over the past 40 years, interest rates and inflation around most of the globe have been on a downward trajectory – a path that was only steepened by quantitative easing after the global financial crisis in 2007-2008.

But today, it is possible that shifting policy in the form of higher interest rates and high and sticky inflation are bringing about a transition point for financial markets, prompting this global reset and a rotation of winners and losers.

How Asia could benefit from the transition

As investors begin to grapple with this new environment, Andrew McCaffrey, global chief investment officer at Fidelity International, says they should consider Asia, which he believes is in a relatively strong position to benefit as this transition takes place.

As part of this outlook for the third quarter of the year, Andrew mentioned three reasons as to why this is. Firstly, Asia is geographically and economically removed from the conflict in Europe. Secondly, regional markets also have a stronger policy arsenal, with inflation generally less of an issue relative to the developed world. Lastly, Andrew believes China’s reopening should have a positive impact on other emerging markets.

“Rising inflation is starting to leave a serious mark on economies across the globe,” he said. “Many parts of Asia are also feeling the strain, though some of its economies can pull on leavers that lie beyond the reach of others.

“Inflation in Japan is rising to a far lesser degree than other developed markets, while Producer Price Inflation in China has, in fact, been falling in recent months, easing fears that cost rises will eventually weigh on the consumer. Consumer Price Inflation in both countries remains well below levels seen across the world’s other major economies. In fact, in Japan, Andrew says a little bit of inflation “has been welcome”, following a multi-year period where deflation has weighed on growth.

“China’s emergence from lockdowns is a clear positive for its economy, and Asia is reopening in other ways too,” he continued. “One area to watch is trade. Washington is considering lowering tariffs on Chinese goods previously imposed by former US president Donald Trump, while new Asia-Pacific trade pacts have been launched this year, such as the Regional Comprehensive Economic Partnership (RCEP) and the Indo-Pacific Economic Framework (IPEF). Travel restrictions are also easing from Japan to Southeast Asia and Australia.

“As the region opens its doors, opportunities have begun to present themselves. China’s reopening should have a positive impact on emerging markets as a whole. We also think Japanese equities offer an interesting diversification option across developed markets. Japan’s economy has relatively high exposure to China’s recovery but avoids some of its risks.”

Funds to consider

Investors who agree with Andrew could consider investing in the region in three different ways: direct exposure to China, investing in Japan or investing in the wider Asian region.

FundCalibre rates six funds investing in Chinese equities, including Allianz China A Shares, which as the name suggests, only invests in Chinese A shares – one of the few major markets in the world which is still dominated by retail investors. In contrast, FSSA Greater China Growth invests in companies listed on all stock markets in Hong Kong, China, and Taiwan.

Research all Elite Rated Chinese equity funds

When it comes to Japanese equities, there are nine Elite Rated offerings on FundCalibre. Amongst these are Comgest Growth Japan, a concentrated portfolio of only 30-40 high quality long-term growth companies that are either head-quartered, or carrying out their predominant activities, in Japan. Investors wanting some higher risk exposure to the country could alternatively consider Baillie Gifford Shin Nippon, an investment trust that targets much smaller companies with innovative growth opportunities.

Research all Elite Rated Japanese equity funds

Of the 16 Elite Rated Asian equity funds investing across the region, we would highlight Stewart Investors Asia Pacific Leaders Sustainability, who’s managers look after all client money as if it were their own. They ignore benchmarks and peer groups and focus solely on delivering the best outcomes for clients. Capital preservation is at the heart of their process. Another option is Matthews Asia ex Japan Dividend which invests across the region in firms of all sizes and blends companies exhibiting dividend growth with more stable, established yielders.

Research all Elite Rated Asian equity funds