In my latest market outlook
, I noted the enduring growth prospects in Asia, despite the fact that some countries in the region, notably China, have experienced a setback this year. I think its worthwhile looking at the reasons for the correction and assessing whether the drivers of growth remain in force.
Certainly, Asia is a diverse region, with the MSCI Asia ex Japan index comprising two developed markets (Hong Kong and Singapore) and nine emerging market countries. The largest constituents are: China, making up around 37%, S Korea 17%, Taiwan 13%, Hong Kong 11% and India 10%.
In 2017, Asian stock markets were roaring away so what’s causing the jitters now? In a nutshell, fears of a global trade war have done the damage. Donald Trump has targeted his tariffs at China which, unsurprisingly, has borne the brunt of market falls. While this clearly could develop into a more serious situation, we have seen before that Trump’s bark is worse than his bite. Hostility towards North Korea has faded, and the US seems poised to negotiate a tariff-free trade deal with the EU. Moreover, exports have declined in importance for China, having fallen to less than 20% of GDP by 2016.
If US interest rates were to rise faster than expected it would be a cause of concern but Asian companies’ borrowings in US dollars are not as high as in the past so the impact is likely to be less severe. In addition, investors are less likely to repatriate capital to the US while real interest rates remain significantly higher in Asia.
The investment case for Asia centres on continued superior growth prospects and relatively attractive valuations. The IMF expects GDP for Emerging and Developing Asia to expand by 6.5% in both 2018 and 2019, compared with 2.4% and 2.2% respectively in the Advanced Economies.
One of the most important themes in Asia is the growth of the middle-class consumer. The OECD estimates that Asia will account for 59% of global middle class consumption by 2030. Consumption is growing at 14% per annum, with healthy wage growth and household access to debt providing a further boost. Even today the median age is just 30 years, compared to 42 years in Europe, and highly educated millennials account for 45% of the population. These aspirational consumers desire premium brands, particularly those from the West, so multi-nationals with global brands can benefit from the trends too.
Many countries are transitioning from being low cost manufacturers of consumer goods for international companies to producing home-grown products and technology. Structural reforms, such as infrastructure investment to improve communications, and enhanced corporate governance are leading to better managed companies producing more dependable earnings growth.
China’s dominance means its success in pushing through reforms will be important for the region. President Xi has an ambitious agenda to reduce corporate debt and close down inefficient State- Owned Enterprises. The country is leading the technology revolution and is set to spend more on research and development than the US this year. It is at the forefront of innovation for electric cars, robotics, renewable energy, healthcare, artificial intelligence and virtual reality.
India, meanwhile, offers even faster growth and is on course to become the world’s 3rd largest economy, behind the US and China, by 2030. Developing its manufacturing base should lift household income and hence consumer spending. Although there has been some short-term disruption from withdrawal of high value bank-notes, and a programme of tax harmonisation, India is over-taking developed nations with its expansion of digital financial services. The collection of biometric data on over 1.2bn people (95% of the population), has allowed most citizens to open bank accounts. With greater mobile phone usage, digital payments have increased tenfold in the past year.
For long-term investors, it usually proves wise to ignore short term geopolitical noise and focus on the fundamental growth drivers of a region. If you are of this mind-set and looking to diversify your portfolio, now might be a good entry-point.
The diversity of the region brings risks as well as opportunities, so I would opt for a professional Fund Manager. They are supported by teams of analysts on the ground, many of whom speak the local languages and get privileged access to companies. There is a plethora of funds to choose from with a variety of strategies. We included Schroder Asian Alpha Plus Fund in this years ISA guide
but whether you prefer large or small cap, income or growth styles, there is something to cater for all tastes.
If you prefer to hone in on the larger economies of China or India, a number of funds are available. Jupiter India is one of our best-sellers and First State Greater China Growth features in our ISA guide. Do bear in mind a single country fund comes with higher risk. For income seekers, the Asian region has attractive and growing dividends and a number of funds offer attractive yields.