Asian equity investors can consider various risk alternatives. As China matures and the Association of Southeast Asian Nations (Asean) and India emerge as industrial centres, investors could split Asia equity allocations between emerging and developed countries or allocate to the MSCI Developed Pacific ex-Japan Index based on growth in markets such as Australia, New Zealand, Hong Kong and Singapore.
Over the past 10 years, the index has returned an annual average of 4.2 per cent. This growth has reflected a relatively high income component, exemplified by a five-year average dividend yield of about 4 per cent. Australia is the largest component of the index, at 58.8 per cent, so it is critical to understand how changing regional growth dynamics affect returns in its economy.
Asia has further integrated within global supply chains that have accordingly incorporated different markets. China has been a key driver of Asia-Pac growth by demanding inputs for export-led industrialisation. As China’s growth shifts toward domestic services consumption, Asia-Pac service sectors that make up most of the index should benefit.
This poses challenges for Australia and New Zealand, but there are also benefits. Tourism, healthcare and education should do well as China's middle class expands. For HK and Singapore, finance, trade and transport offer strong potential.
Australia represents more than half of the MSCI Pacific ex Japan Index, so its currency has contributed much to the benchmark’s total return. Understanding the country’s growth dynamics and its import/export role within the region is crucial. The country’s boom since 1992 is the longest in modern history. China’s demand for minerals has fuelled that growth. Unsurprisingly, China is Australia’s largest export market, accounting for 34 per cent of export income, with the total for Asia representing 80 per cent.
Although mining accounts for 75 per cent of Australian economic output, education, finance, healthcare and inbound tourism have represented more of exports since 2014. Diversification should continue as China's economy evolves. Australia’s economic boom has depended upon household consumption, with immigration driving fast population growth.
- Over the past 10 years, the MSCI Developed Pacific ex-Japan Index has an annualised return of 4.2 per cent.
- Australia represents more than half of the MSCI Pacific ex Japan Index.
- Asia-Pac markets offer more attractive growth than emerging Asia.
Hong Kong is the second largest component, at 29 per cent, of the MSCI Developed Pacific ex Japan Index. It has long been the gateway for China’s trade. In 2015, financial services represented 17.6 per cent of Hong Kong’s GDP. Services should contribute more because much manufacturing has shifted to mainland China or Asean countries.
Expanding Chinese services demand should benefit the country. Integration through StockConnect and other initiatives should drive asset management and securities transaction services. Banking services alone increased 95 per cent from 2006 to 2015. China’s transition should thus shape HK’s growth dynamic.
Singapore is 11 per cent of the MSCI Developed Pacific ex Japan Index. Its largest trading partners are China and Hong Kong. Manufacturing is more important for Singapore, at about 20 per cent of GDP in 2016, than for Hong Kong. Strong demand from China and globally for semiconductors and related components have recently boosted that sector.
Services, principally transport and finance, have started accelerating again this year. IT and information services and other communications should be key growth segments as Asian IT spending increases. In expanding industrial capacity, Asean economies are increasingly competitive in basic manufacturing sectors that China has dominated. Singapore can take advantage of this change as a regional gateway.