Asia holds a strong position in today’s investment landscape, with the sector attracting investors who seek growth away from western markets, such as the US and Europe. The Investment Association’s Asia Pacific ex Japan category currently contains 97 funds. Though there are passive strategies among these, the market is dominated by active managers searching for opportunities in a region experiencing continuous growth and economic development.
From a style perspective, as growth stocks largely outperformed value since the global financial crisis, there are typically more growth-oriented strategies than value funds today, as the popularity of the former has grown over the years. That said, market sentiment has shifted towards value names more recently, and strategies with a growth style bias have suffered in terms of performance.
We have also seen a small but growing number of responsible funds emerge over the years. Some take a passive or active approach and may include a range of exclusions, such as tobacco and gambling, and/or solely focus on companies providing solutions to environmental or social issues.
Macro backdrop
The Asia Pacific region, excluding Japan, is characterised by rapid economic growth and technological advancement. Experts point to the benefits of investing in Asia, such as the favourable demographics in India, including a growing young and skilled population and a rising middle class, leading to increased productivity and spending.
In light of these factors, local economies have prioritised growth policies to attract investment. For example, there has been a notable expansion in technology and innovation during the past few decades, with the rise of global giants, such as Samsung and TSMC, that now play a significant role in the global race for AI technology and chip manufacturing.
While the region has experienced strong growth and development over the years, tensions between the US and China have created uncertainty that has had an impact on investor sentiment. Foreign investor sentiment was affected further by the weak post-pandemic economic growth in China and the property crisis.
However, in recent months China has introduced a stimulus package to boost economic growth. Interest rates were eased, for example, which has served as a catalyst for markets, alongside easing interest rates in the west.
Though these developments are seen as positive thus far, investor sentiment remains somewhat cautious. This is largely a result of the US election results, with many investors hesitant to increase exposure to the region until clear policies unfold post the inauguration of president Donald Trump.
Performance put to the test
A severely challenging period began for the Asia Pacific region in 2022, as most markets were heavily influenced by macroeconomic factors. The Russian invasion of Ukraine, fears of higher interest rates, global inflationary pressures, surging global commodity and energy prices, together with ongoing supply chain issues, including component shortages, all affected market sentiment.
Additionally, China’s property market woes and continued lockdowns contributed to the overall difficulties faced. As such, 2022 started with a risk-off period where there was a shift away from high-growth stocks, resulting in a heavy de-rating of valuations, particularly in the technology sector.
There was a wide dispersion of performance within the region’s markets over the course of the year. For instance, investor pessimism was high especially towards China, the largest market, which at one point was down 33% (at October end), but ended 2022 at -12%, thanks to the market rallying towards the end of the year on its recovery potential following pandemic lockdowns.
In the fourth quarter of the year, China announced the lifting of lockdown restrictions and the reopening of its economy. This led to an improvement in investor sentiment towards the region, and a more positive outlook.
Most of the region’s markets rebounded at the start of 2023, initially due to early optimism of China’s post-Covid economic reopening alongside lower growth expectations in the west. However, as the year progressed, market sentiment deteriorated and recession risk increased, primarily in developed markets.
Rising concerns over the state of the global banking sector and ongoing US-China tensions also had a negative impact. The poor pace of China’s consumption recovery weighed heavily on investor sentiment, with the country a key underperformer.
The Asia Pacific region began 2024 by underperforming the US and Europe during the first quarter, subsequently recovering and outperforming during the following quarters. This has been driven by rising optimism over the region’s strong potential and low valuations, alongside further expectations of rate cuts in developed markets and a soft landing in the US.
This was boosted in September by China’s announcements of stimulus across different areas of the economy.
However, investor uncertainty remains as to how the global geopolitical backdrop will unfold over the coming months.
Despite these challenges, fund managers continue to believe that China’s reopening presents numerous opportunities. They also predict Chinese consumer spending will increase over time driven by high consumer savings and an uptick in property sales. The outlook for the region remains cautiously optimistic, acknowledging both the potential for opportunities and the ongoing risks, with the latter namely geopolitical.
Overall, Asia fund managers remain positive on the long-term outlook, as they see significant opportunities, such as strong earnings growth for companies at attractive forward valuations.
Read the rest of this article, plus Amaya Assan’s funds to watch by assets under management, three-year performance and newcomers in December’s Portfolio Adviser magazine
