Investing in Asia is no longer a leap in the dark for U.S. investors; it’s a matter of catching up with economic reality. This is Part One of a five-part special report on Investing in Asia.
The world’s economic axis has shifted decisively from West to East -- but the portfolios of your wealth clients have not followed suit. According to IMF data, Developing Asia will account for more than a third (34.1%) of global GDP this year -- a great leap forward from 8.9% in 1980. Further, the region will deliver 62% of global GDP growth in 2019, with China, now the world’s second-largest economy, accounting for more than half, despite its modest 6-6.5% GDP growth target.
U.S. investors mostly accrue a broad Asia exposure from their developed and emerging market exposures, rather than a dedicated allocation. By doing so, they are passing the allocation decision to their advisor or accepting passive market cap exposure.
“Where there is interest, it is country exposure specifically to China, rather than Asia as a whole,” says Deborah Hazell, CEO, HSBC Global Asset Management (U.S.). “Awareness is increasing. Without a dedicated exposure, investors are beginning to realize they are ignoring a fast-growing and sizeable part of the world.”
Chetan Sehgal, director of portfolio management for Franklin Templeton Emerging Markets Equity, sees “keen interest” from mass affluent U.S. investors. “Prospects of healthy growth coupled with the wide opportunity set in the investment universe have been the key drivers of increase in appetite for investments in Asia,” he says. “Rapid technology innovation and improving productivity are leading to increases in income levels and consumption growth. Valuations too are lower when compared to the developed market counterparts. Appetite is being further supported by easy access to large number of EM/Asian funds.”
Technology innovation is not only driving growth in emerging Asian markets but reinvigorating developed ones.
“Japanese firms are building global brands in robotics and other niche sectors. There are opportunities – but it requires some off-index thinking,” says Tai Hui, chief market strategist for Asia at JP Morgan Asset Management.
And while China’s rising tide lifts all ships in the Asian harbor, the region’s diversity remains.
“Within equities, we’re focusing on improving corporate governance in Korea, technology leadership in Taiwan, premiumization trend in China and increasing penetration in India,” adds Shegal.
“Where there is interest, it is country exposure specifically to China, rather than Asia as a whole.”
HSBC Global Asset Management
Nevertheless, Michael Crook
, head of Americas investment strategy at UBS Global Wealth Management
’s chief investment office, sees three long-term factors that should compel financial advisors to pivot their clients toward the East. “Asian equities have more attractive long-term earnings growth than U.S. counterparts; Asian economic growth is powering equity market growth; and Asia’s high skilled workers are no longer migrating to the U.S. – they’re staying at home,” he explains. “U.S. investors have done very well by investing domestically over the past 60-70 years. But now they must view Asia as part of the overall opportunity set.”
The most urgent case for rebalancing comes from Asia’s emerging markets -- China in particular. Having turned itself into the world’s manufacturing hub, dragging adjacent economies in its wake, China is now moving up the value chain to become a consumer-led service-based economy with an appetite for international capital.
The Chinese economy has doubled in size since 2010. The service sector accounts for more than half of its GDP. But foreign ownership of mainland-listed stocks is less than 5%; international holdings of bonds are even lower. Access channels are being simplified, tax barriers removed, regulations overhauled and hedging tools developed as China seeks to attract inflows, if not at the pace some investors, and indeed politicians, would like.
“During the accelerated transition phase of the past decade, China has achieved more than other countries in 30-40 years,” says Philip Lawlor, managing director, global markets research, FTSE Russell.
So, have we missed our chance? Prospects for future Chinese growth are underpinned by a policy triple-lock, according to Charles Su, managing director of CIB Research, who believes all allocators should consider revising upward their exposures.
First, Chinese equities in particular and the country’s financial markets in general have low correlation levels with U.S. and European counterparts. This is largely due to economic policy decisions, such as deleveraging conducted in 2018, while Western central banks dialed down quantitative easing. As Su says, China’s size means its credit policy decisions now have global repercussions.
Second, China has shown a consistently pro-growth agenda and has a commendable track record in delivering on forecasts. Its 2019 forecast might be lower than achieved in recent decades, but there is a determination to deliver on a commitment to add 11 million jobs across the year. “Better growth means better returns,” said Su.
Third, those concerned about China’s debt mountain should take comfort from the implicit state guarantee against potential default. “The government cannot tolerate defaults turning into a crisis, so it is actively engaged in digesting the problem,” says Su, pointing out that China’s one-party political system lacks the safety valve of democratic countries. “China cannot afford the dissatisfaction of a recession. RMB assets deliver double-digit returns due to China’s pro-growth agenda.”
Next: The Powerful New Force Tipping the Scales Towards Asian Investment