Dom­i­nant en­gine of global eco­nomic growth

The Asia-Pa­cific re­gion, while not with­out its prob­lems, is of­ten un­der­es­ti­mated or over­looked by South Africans.

Finweek English Edition - - FUNDFOCUS -

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.

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