Funds investing in Asia attracted £154m of net retail sales in July, according to the Investment Association (IA). Indeed, aside from global funds, into which there were inflows of £146m, it was the only region with positive fund flows during the month.
Adrian Lowcock, head of personal investing at Willis Owen, says the investment case for Asia centres on its “superior growth prospects and relatively attractive valuations”. He says the IMF expects GDP for emerging and developing Asia to expand by 6.2% in both 2019 and 2020, compared with 1.9% and 1.7%, respectively, in advanced economies.
“One of the most important themes is the growth of middle-class consumers,” he says. “The OECD estimates Asia will account for 59% of consumption by 2030. The average age is 30, with highly educated millennials accounting for nearly half the population. These aspirational consumers are relatively affluent and desire premium products.
“Many Asian countries are transitioning from low-cost manufacturing of consumer goods for international companies to homegrown products, technology and services. Corporate governance is improving and leading to better-managed companies producing more sustainable earnings growth.”
US-China trade tensions
Lowcock notes China’s president Xi wants to reduce corporate debt and close down inefficient state-owned enterprises.
“China is leading the technology revolution and is set to spend more on research and development than the US,” he says. “India, meanwhile, offers even faster growth and is on course to become the world’s third-largest economy by 2030. After a hectic programme of reforms by Narendra Modi, the economy stalled, meaning the recent announcement of a steep reduction in corporation tax was well received.”
As a result, while Lowcock says the US-China trade tensions will clearly have negatively affected some Asia countries, he believes it is usually wise to ignore short-term geopolitical noise and instead focus on the fundamental growth drivers.
Asia versus EM indices
Chris Rush, investment analyst at Iboss, says while Asia and emerging markets are often seen as two different entities, in reality the indices are similar.
“After a decade of largely upward-moving markets and momentum-driven investing, it is more important than ever to know what you are holding across your portfolio,” says Rush. “While the MSCI EM Index is arguably more diverse than MSCI Asia, it still has almost 70% weighted to Asian countries.
“This has only increased over time as the rise of India, China and the tech giants have begun to dominate the emerging world. This is reflected by the fact that the top-four holdings in GEM and Asian indices are Alibaba, Tencent, Taiwan Semiconductor and Samsung, making up 16.27% and 11.12% of the GEM and Asian indices, respectively.” What investors need to be aware of, says Rush, is that an index allocation to Asia and emerging markets provides no real diversification benefits to a portfolio of funds.
Furthermore, he adds that many of the top-performing and high-profile emerging market funds are essentially Asian funds measuring themselves against a different benchmark.
“The best way to play Asia is to take part in the trends of the past decade by selecting managers who have proven themselves capable of spotting future opportunities.
“It is important, however, to select funds in the emerging market space that complement your Asian holdings through more active geographical or sector positioning.”
Asia fund picks
Ben Yearsley, senior investment director at Shore Financial Planning, says that in the past 12 months he has raised his exposure to Asia marginally, at the expense of Europe.
“Europe is turning Japanese and, despite some excellent world-beating companies, the growth prospects aren’t great,” he says. “Contrast that with Asia where growth, demographics and debt are so much more favourable. Yes, there are more risks but, for longer-term investors, I know what I prefer.”
To get exposure to Asia, Yearsley keeps his investments simple. He has held First State Asia Focus and Schroder Asian Alpha Plus in his portfolios for a number of years, while, like Rush, he reminds investors they will also get Asian exposure via emerging markets and Japanese funds, both of which they have in portfolios.
Yearsley says: “Going back to First State and Schroders, I view these as complementary, long-term holdings. They are managed by investors, not traders. “First State focuses on quality companies that have strong franchises and balance sheets: sustainable companies in it for the long term. Similar to First State, Schroders is a bottom-up stockpicking fund with a hint of contrarianism.”
