Dominant engine of global economic growth
The Asia-Pacific region, while not without its problems, is often underestimated or overlooked by South Africans.
in early October I had the good fortune of attending investment conferences in Singapore and Chiang Mai, Thailand, respectively, and in spite of having travelled to Asia-Pacific on many occasions previously, I was astounded yet again by the unbelievable opportunity the region offers.
I was further reminded of the extent to which it is underestimated and overlooked by South African investors; perhaps we’re still too fixated with the US, Europe and the UK.
I’m under no illusion though that Asia-Pacific has had a tough few years (not least 2016), especially underpinned by economic slowdown in China, economic worries in Japan and geopolitical concerns regarding South Korea.
But equally, little respect was shown there for the US’s mounting problems; Europe’s PIGS (Portugal, Italy, Greece and Spain) that nearly pushed the global economy into another recession; and the UK that more recently rocked the boat as well.
Asia-Pacific has boasted extraordinary pace of change, modernisation and economic growth over the past 20 years. Rising personal wealth and consumption, combined with gradual economic liberalism and the spread of technology, have radically transformed its markets. In fact, today it’s the dominant engine of global economic growth.
Consider that in 2009 China surpassed the US in motor sales, and by 2011 had 100m passenger cars. South Korea leads the world in broadband access, with more than 80% of households being connected. Asia has the largest community of people online by total number of internet users.
JP Morgan Chase lists these additional reasons for focusing on Asia-Pacific:
The Asia story is one that is fundamentally driven by strong demographics, rising wages, low debt and high savings; If we see a pick-up in OECD growth, Asian exporters will be key beneficiaries of this; Rapidly growing economies, particularly China, have much scope to boost private consumption; Asia ex-Japan has relatively low levels of debt, particularly consumer debt; Listed Asian companies generally have stronger balance sheets than Western companies. Gearing for Asia ex-Japan has fallen from 60% during the Asian crisis to 30% currently; Asian governments have an abundance of foreign exchange reserves, have relatively balanced fiscal positions, and employ sustainable fiscal packages as counter-cyclical tools; Asian infrastructure continues to be one of the most exciting stories within the region; and, Political risk in Asia is declining. Leading Asia-focused US asset manager Matthews Asia says important points one needs to heed in investing in Asia-Pacific are taking a long-term view, having patience, committing to relentless research, and always looking forward.
“We believe that a longterm outlook helps investors better understand and withstand the region’s inherent volatility. Most Asian countries are subject to political, social and economic uncertainties typically characteristic of emerging markets.”
Also worth remembering is that Asian investors are known to chase faster, riskier trades than their Western peers and like latching on to themes. “Asian investors typically look for higher, short-term returns and are willing to take bigger risks than their Western counterparts,” says Société Générale Asia strategist Marc Lansonneur.
Thematically, a more conservative Japan is ironically considered a stand-out in many circles at present, a home market after Switzerland. “We have been recommending that clients get exposure to Japanese equities, provided they make the most of opportunities and buy dips in the market,” one analyst told me in Chiang Mai.
He explained that Japanese equities are yielding more than US equities; the Japanese authorities are evidently uncomfortable with the yen at its current levels; a rise in US Federal rates should cause a dramatic fall in the yen; and a weaker yen will mean stronger stocks.
My personal bias on a country basis is towards South Korea. It’s extremely competitive globally; has a welleducated and savvy workforce; and growth in labour productivity and private sector spending on technical education remain among the highest in the world. Its research and development spending has outpaced both that of the US and Japan. I would caution against buying individual shares in the region and recommend rather that you buy into Western-based mutual funds with diversified Asia-Pacific portfolios and that have a wider investment range than strictly AsiaPacific orientated portfolios. Best performers in US dollars among these this year are Parnassus Asia Fund (+25.34%), Fidelity Pacific Basin Fund (+23.66%), Matthews Asia Growth Fund (+23.02%), Matthews Asia Dividend Fund (+17.77%) and Invesco (+17.65%).
Returns differ widely, however, depending on exposure to countries, sectors and investment styles. The most preferred sectors tend to be financial services, technology, consumer cyclical and defensive, industrials and basic materials.
Closer to home, you might consider the Sanlam Asia Pacific Fund of Funds, which aims at providing long-term capital growth by investing in companies throughout Asia excluding Japan. Among its principals’ top holdings are Taiwan Semiconductor Manufacturing, Tencent, AIA Group, Samsung Electronics and Alibaba.
The fund’s three-year annualised rand return is 13.3% and the one-year figure 6.3%.
The Asia story is one that is fundamentally driven by strong demographics, rising wages, low debt and high savings.
A board showing South Korea’s benchmark stock index earlier this year.