InvestmentsJun 22 2015

Take a broad view when investing in Asia

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Investing in Asia immediately brings to mind the powerhouses of Japan, China and India. But while economic reforms and monetary policy have helped to boost India and Japan in recent months, China has been struggling.

However, with the country now focusing more on reform, the future could be looking brighter. Laura Luo, head of Hong Kong China equities at Barings, says: “Although the headline pace of economic expansion might slow, the emphasis on reform has increased and we think it will have significant consequences for China’s economy and markets.

“The measures to improve the return on capital at state-owned enterprises, while opening them up to reform to support the private sector and to encourage further financial sector liberalisation, will have a profound effect on China in the long term as it prepares for potential recognition as a market economy by the World Trade Organisation in 2016. If we include recent measures to improve liquidity in the market, our view is that investment conditions are highly favourable in China.”

L&G Asian Income fund manager Paul Hilsley adds: “China’s leadership has been focused on reform and a lot of the changes being imposed, while painful during transition, are likely to be positive in the long term. Corruption is a blight on the economy and needs to be reduced. Other measures, such as stockmarket and household-registration reforms, are positive developments and will help set the economy up for its next stage of rebalanced growth.”

But until these reforms start to bear fruit, there are other opportunities in Asia if investors are prepared to look for them. For example, for the five years to June 9 2015, the best-performing MSCI Asian country index was the MSCI Philippines with a rise of 120.76 per cent compared with the MSCI Japan index gain of 46.66 per cent, the MSCI China increase of 46.47 per cent and the disappointing 10.48 per cent rise in the MSCI India index.

For the year to date, China has improved with a gain of 20.81 per cent to June 9, data from FE Analytics shows, although the MSCI Hong Kong index posted a reasonable increase of 14.95 per cent and the MSCI Taiwan and MSCI Philippines indices gained 3.43 per cent and 3 per cent respectively.

So what is the appeal of these emerging Asian markets compared with their slightly more developed peers?

Jade Fu, investment manager at Heartwood Investment Management, explains: “Real GDP growth for emerging market Asia easily outpaced other emerging and advanced economies in 2014, averaging 6.4 per cent. Forecasts for this year and next are lower, but they remain reasonably robust. Government balance [sheets] are in good shape and in many cases stand out versus advanced economies.

“Low external debt levels and ample foreign exchange reserves should place emerging Asia in a stronger position to withstand the impact of US Federal Reserve rate hikes. Also, most emerging Asian countries are not reliant on commodity exports to fund their current accounts, leaving them less vulnerable to a strong US dollar.”

Not everyone is positive on these areas, with Cho-Yu Kooi, manager of the JOHCM Asia ex Japan Small and Mid Cap fund, suggesting Taiwan and India provide the best opportunities outside of China and Japan. She says: “We have reservations in Asean [Association of Southeast Asian Nations], as the past few years have been some of the best for this region both in terms of economic growth and stockmarket performance.

“Most of the Asean countries have enjoyed extended credit cycles, given the low interest rate environment, from abundant capital inflows and benign inflation. Consumers and corporates have leveraged up and expanded aggressively and stockmarket valuations became very expensive. This has started to reverse, with a tightening of liquidity conditions given the US dollar strength and capital outflows. Companies are increasingly reporting disappointing earnings results and banks are showing rises in non-performing loans.”

But while some areas could be in for a tough ride others, such as the offshore gambling resort of Macau, could transcend the economic and market environment.

Hermes Emerging Markets senior analyst Kunjal Gala notes: “The evolution of Macau’s gaming sector continues, and after a period of severe underperformance the prospect for growth looks appealing. Improved access via high-speed rail links into mainland China and the completion of the Macau-Hong Kong bridge will drastically reduce travel time for visitors, sustaining the inflow of new customers on a long-term view.”

Nyree Stewart is features editor at Investment Adviser