Investment Opportunities In Asia
The Asia-Pacific region remains resilient, and expected GDP growth is around 5%. Along with strong domestic demand in some countries, global demand (particularly inter-region demand) is proving a significant boost for export-oriented companies. It is difficult to think of the other part of the world that provides the diversity of investment opportunities available in Asia – Pacific. That is because the region consists of so many different countries from developed nations like Australia, Hong Kong, Japan and Singapore to emerging markets like China, the world’s second-largest economy. It can also offer exposure to frontier markets such as Cambodia and Vietnam.
The forward 12-month earnings growth expectation for the MSCI AC Asia Pacific Index is 12% as of June 16, 2017. It is expected that the developing countries within the region are set to outperform through 2017, while the outlook for the developed countries is far more mixed. This trend of economic power shifting eastwards is likely to continue, giving a compelling image of the long-term prospects for the region’s relatively small and underdeveloped equity and bond markets. After the financial crisis in 1997, Asian economies have transformed them drastically. Countries have implemented market reforms and promoted the private sector, resulting in strong growth and stable currencies. They are now home to some of the world’s most dynamic businesses across technology, manufacturing and outsourcing as well as thriving telecoms and infrastructure industries.
Current Status of Asian Countries
Looking first at developed Asian countries, the Japanese economy is benefiting from a strong demand for exports, but remains lackluster as personal consumption continues to lag. Inflation continues to be sluggish; monetary policies have been Accommodative, and we expect the Bank of Japan to maintain this through the remainder of the year.
In Singapore, consumption and investment have been declining, despite a strong regional demand for exports. The one fully positive story among developed Asia-Pacific economies is Hong Kong, where growth has been accelerating off the back of strong external demand and robust investments. We expect decent growth for the rest of the year, with an overheated property market becoming the key threat to the economy.
In comparison, the developing economies in the region continue to show strength. Growth in China remains robust. Despite concerns around heightened debt levels, industry surveys of business activities and indicators of growth point to further expansion.
Growth in India has been hampered recently by the effects of the Demonetization policy. The expectation is to filter out concern over the coming months and move towards acceleration in economic activity in the second half of 2017. Business and consumer sentiments have been rising in South Korea, which is driving a pickup in economic activity, while monetary policy remains Accommodative. Growth in Philippines and Malaysia is accelerating, while economic activity in Indonesia continues to expand at around 5% per year.
Investment ideas begin with previous experiences in Asia and knowledge of emerging developments that will have a structural impact on Asia’s economies, including:
• The growth of personal income and its impact on domestic spending power
• The evolution of financial markets, including credit and banking
• Improving standards of corporate governance and transparency
• The adoption of technology, leading to further innovation and productivity
• Demographic changes throughout the region
• Political reforms and economic deregulation
Against the backdrop of these and other macro developments, one can narrow in on businesses that stand to benefit from the region’s evolution.
The region has become increasingly favorable with investors seeking growth and more reliable sources of income. Asian companies have been increasing their dividend payments over the past few years as they focus on delivering shareholder returns. However, income opportunities are not limited to equities, with many Asian corporate bonds also offering attractive yields.
While developed nations can work as the foundation of an Asia-Pacific investment portfolio, emerging countries offer the potential for even higher returns. Although in the past, growth has been driven by exports, increasing domestic demand from wealthy middle classes with more money to spend is gaining ground. As a result, sectors such as banking, housing and retail also offer valuable opportunities.
It is preferred to gain exposure to the region through specialist actively managed funds. They use bottom-up investment processes to identify companies that are well-managed, and with the competitive position and vision to grow their earnings well into the future. Clear financial reporting is another important factor to consider, which is often lacking in many companies across Asia.
By Humneet KAUR