Europe and the United States have been the main sources of turmoil in global markets during the past year, but investors in Asia have had more than their share of suffering. Asian stocks were hit especially hard by concern that slowing US and European growth would depress Asian exports, and disdain for risk of any sort contributed to the weakness.
A spirited recovery that began last autumn has taken the MSCI All Country Pacific index to a total return of 0.1 per cent in the 12 months through March 14, but it lags behind the 2.6 per cent return of the MSCI All Country World index. Risk appetite waxes and wanes, and crises come and go. Other factors are likely to determine long-term returns in Asia and therefore the best role for Asian assets in a portfolio, investment advisers say. Their views vary, however, on whether performance will be superior in the region and how to achieve the best results.
Bullish investors in Asia point to a robust and enduring trend toward greater economic self-reliance in the region.The dominance of exports and low-end manufacturing is being supplanted, they say, by a flourishing of service industries that cater to domestic consumers with steadily improving standards of living.“The appealing thing about Asia, particularly emerging Asia, is that it’s a region of the world that’s not entirely dependent on developed economies to generate growth,” said Michael Hood, global markets strategist at J.P. Morgan Asset Management. “China has a large and reasonably rapidly growing domestic market; India, too, to some extent.”
Foreign trade will continue to be important in Asia, but more of it will occur within the region, Hood said. “China is more open for trade and capital flows and has a big supply chain in emerging Asia,” he said. “Thailand, Korea and Taiwan all benefit from growth in China.”
Arjun Divecha, manager of the G.M.O. Emerging Market Fund, is a strong advocate of the domestic-consumption theme in Asia and other developing economies. In a recent report, he said he expected it to be “one of the most compelling investment opportunities over the next few years.”
He foresees populations in those economies spending significantly more on consumer goods in part because their rapidly growing prosperity gives them significantly more to spend. He noted that as economic output per person in China quadrupled in the past decade, annual car sales rose to more than 17 million from one million.
Divecha also points out that it is not just disposable income that is expanding. Demographic trends ensure that the number of people entering their peak earning years is increasing at a rapid pace in developing countries, just as baby boomers are starting to retire in the West.Yves Bonzon, chief investment officer at Pictet Wealth Management, is more cautious. He contends that Asian economies and markets were not as strong as they seemed in the past decade. Big gains were driven in large part by two one-time events, he said: the recovery from the regional crisis of the late 1990s and China’s admission to the World Trade Organisation in 2002, which greatly expanded access to foreign markets.“When it comes to Asia, investors tend to have a preconceived positive view of the outlook for the region and consequently the performance potential of local markets,” Bonzon said. “This view is, unfortunately, not substantiated by the facts.”
A one-time event that he said could influence markets for years is the upheaval in Europe. Bonzon added that advocates for investing in Asia often laboured under “the false idea that faster economic growth leads to higher financial asset returns.” The prevalence of that idea was evident in early March when the Chinese authorities lowered their target for annual growth to 7.5 per cent – and stock markets tumbled worldwide.
Hood, at J.P. Morgan, holds no such illusions. He says that slower economic growth can produce a better climate for investment, and he anticipates a gradual deceleration in Asia as the region matures.Hood recommends keeping 10 per cent to 15 per cent of an equity portfolio in mainland Asia, slightly more than the region’s weighting in global indexes. He would also try to capture growth in Asia through shares of Western companies that produce raw materials or do business in economically sensitive industries.
Jonas Krumplys, manager of the Ivy Asset Strategy Opportunities Fund, prefers a more inclusive approach, as Hood does, and advises long-term investors to be overweight in Asia in global stock portfolios through domestic and foreign companies alike.