The past year has seen many equity investors shy away from the Asia-Pacific ex Japan region, with the Investment Association sector recording just two months of net inflows in 2016.
While there has been a pick-up in emerging markets sentiment of late, the area – particularly the countries in the Trans-Pacific Partnership (TPP) – faces a potentially strong headwind in the form of Donald Trump.
His protectionist rhetoric has already seen the US withdraw from the TPP, and with his “America First” mantra, there is the potential for further trade shifts in the Asiatic region.
But Jason Pidcock, manager of the Jupiter Asian Income fund, says: “While trade protectionism from the West will have an impact on Asia, the effects are less pronounced than one would imagine. More than half of all Asian trade is done in the region – Asia was once heavily reliant on Western demand [but] that is quickly being overtaken by local consumption.”
He continues: “Premier Xi Jinping was at Davos last month – the first time a Chinese head of state has attended the forum. Investors should take note when a communist is championing free trade in a gathering for global capitalism: With the US out of the picture, and the European single market having the potential to crumble, China will be looking to take charge of this situation. The 16-nation Regional Comprehensive Economic Partnership it is advocating is proof of this and, if successful, would firmly establish Asia-Pacific as the world’s trading powerhouse.”
Another Asian emerging market, India, also continues to attract interest from investors.
Gary Greenberg, head of emerging markets, and Kunjal Gala, senior analyst, at Hermes Investment Management, say: “India’s presence is being felt in Asia as a strategic counterweight to China and its voice in the G20 is being heard. The government has made a good start in its effort to underwrite sustainable long-term growth. Its substantive reforms, aimed at fixing structural problems in its economy, contrast with the Chinese government’s recent tactic of short-term fixes to temporarily boost growth.”
They add: “The world is seeing a new India emerging, and the space once held by outdated conglomerates from the time of the red-tape ridden ‘Licence Raj’ is being claimed by businesses willing to compete through innovation and efficiency.”
In a recent economic briefing Govinda Finn, senior analyst at Standard Life Investments, noted Asia’s open, export-orientated economies struggled in 2016 from lacklustre global trade growth, which combined with competition from China to hamper export activity, before reversing dramatically in the final quarter of the year.
“The magnitude of the rebound, with December exports in Korea, Taiwan and Singapore growing by 6.4 per cent, 14 per cent and 7.4 per cent, respectively, combined with the breadth of all major economies in the Asian region except China seeing positive export growth, points to a material change in the external environment,” says Mr Finn.
While the actions of the US could cause some headwinds for the Asia-Pacific ex Japan region overall, a resulting focus on growth and trade within the region could provide some interesting opportunities for investors.
