Regional insights – why Asia is punching above its weight
For over 50 years, Asia’s economy has been on an upward trajectory. But far from having reached its full potential, the region could continue to offer investors above-average growth and diversity.
A new chapter in Asia’s growth story has begun. As the region’s economy and society move from being production-led to consumption-led, investment opportunities in Asia, and the forces driving them, are evolving.
Governments across Asia are rolling out ambitious reform programmes to diversify away from state-owned business dominance towards entrepreneurship, encouraging fresh thinking. At the same time, they are investing in infrastructure projects, overhauling their regulatory environments and embracing new technologies in a bid to foster long-term growth.
‘China and India are embarking on major reforms, while the economies of Southeast Asia, specifically the ten members of the Association of Southeast Asian Nations (ASEAN), are experiencing strong growth,’ notes Robin Parbrook, co-manager of Schroders Asian Total Return Investment Company plc. ‘Government balance sheets across the region are also generally healthy.’
Stockpickers are finding quality companies at a reasonable price in all markets – including Japan, where reform has not yet achieved its goals. Says Andrew Rose, manager of the Schroder Japan Growth Fund plc: ‘There is a positive bottom-up (looking closely at individual companies) story when you consider valuations, profits and incentives to improve corporate governance.’
New middle-class consumers
This government-fuelled change agenda is empowering younger generations and contributing to the rise of the Asian consumer as the burgeoning middle classes buy into a new lifestyle. Given that the region is home to 60% of the global population, the domestic growth story for Asia is exciting.
Analysts predict that in 15 years’ time over half of the world’s middle class will be in Asia. ‘They will want different services, better healthcare, more sophisticated offerings from the companies we invest in – and we believe that will be a great environment for us to make money for our clients,’ says Matthew Dobbs, manager of the Schroder AsiaPacific Fund plc and Schroder Oriental Income Fund Limited.
As fears over the sustainability of dividends in the western world continue to grow, Matthew also notes that the strength of Asian companies as income investments is largely overlooked. ‘I believe it is easier in Asia to find good quality, economically sensitive companies in sectors such as information technology and industrials offering attractive and well-covered dividends as well as more defensive and highly cash generative stocks. There is a diversity of income available across sectors and markets.’
Asia-wide investment appeal
‘Outside Japan, the demographics of the region are appealing,’ points out Robin. ‘If you consider the “population pyramid” in India and the Philippines, for example, there is a young population driving consumption and a growing middle class.’
The Organisation for Economic Co-operation and Development (OECD) expects the rise of the middle class – especially in China and India but also across Southeast Asia – to boost spending on household durables, automobiles, education and healthcare services. In the nearer-term, it predicts that Asian economies will grow by 6.9% per annum between 2014 and 2018. By contrast, the OECD estimates 2% growth for the Eurozone in 2016 and 3% growth in the US over the same period.
‘Growing demand also means that intra-regional trade is becoming as important to Asia as exporting,’ says Robin. And of course, growing trade between the Asian countries is another tick in the sustainability column for the region’s long-term economic outlook.
Knowledge to unlock the region
As encouraging as Asia’s growth prospects may look on paper, the hype around macroeconomic data can often cloud investment decisions. ‘Making money on Asian stock markets requires skilled investing in quality companies providing consistent shareholder returns (including dividends) and trading at sensible valuations,’ says Robin.
It also requires intimate knowledge of the local markets, which in Asia, are extremely diverse. Schroders has had an on-the-ground presence in Asia for over 40 years. Moreover, our range of investment trusts specialising in Japanese and pan-Asian equities are run by highly experienced fund managers, supported by a large team of investment analysts, who can leverage their closeness to the local markets to spot investment opportunities.
Bottom-up stock-picking (which focuses on looking closely at individual companies) is the prime driver of portfolio construction, with top-down inputs (economic factors) incorporated to ensure appropriate diversification of countries and currencies. The aim is to look beyond current earnings to identify good quality companies that can maintain or grow their dividends and provide the potential for capital growth.
‘For example, the advent of new technologies, in particular the quantum leap in processing power and communication technologies, is leading to a “third industrial revolution” in Asia,’ Robin explains.
‘But disruptive technologies will impact businesses everywhere, so it is imperative to invest in companies based on their individual merits and current share price – looking for those with true long-term growth prospects,’ he says. ‘On this basis, and against a backdrop of growing domestic demand, Asia continues to provide many strong investment opportunities.’
It is important to remember that when investments are denominated in currencies other than sterling, the exchange rates may cause the value of these investments, and the income from them, to rise or fall. Also, investing in emerging markets and the Far East involves a high degree of risk and should be seen as long term in nature. Less developed markets are generally less well regulated than the UK, they may be less liquid and may have less reliable arrangements for trading and settlement of the underlying holdings. Finally, please remember that the value of investments and the income from them may go down as well as up and you may not get back the amounts originally invested.
- By 2030, Asia will account for 66% of the global middle-class population and 59% of middle-class consumption.
- Asian exports represent about 40% of the global total and, according to the World Trade Organisation, grew by 4.7% in 2013 – faster than any other region. Exports from China and India increased by 7.7% and 7.4% respectively.
- Trade corridors between Asia and North America and between Asia and Europe are now more important than the flow of trade across the Atlantic, while trade between Africa and Asia is growing in importance.
- Asia recorded the fastest regional GDP growth in 2013 at 4.2% (almost equal to its growth in the previous two years).
- The IMF estimates that lower oil prices could add an average of 1.7% to Asian countries’ GDP.
- Based on World Bank data and assuming a continuation of recent growth rates, China, India, Indonesia, Malaysia, the Philippines, Thailand and Vietnam will join Japan, Korea and Singapore in the ranks of the advanced high-income countries between 2020 and 2059.
What are the risks?
- Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.
- The funds hold investments denominated in currencies other than sterling, investors should note that exchange rates may cause the value of these investments, and the income from them, to rise or fall.
- The funds invests in smaller companies that may be less liquid than in larger companies and price swings may therefore be greater than investment companies that invest in larger companies.
- The funds may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so
Asian Total Return Investment Company plc , Schroder AsiaPacific Fund plc and Schroder Oriental Income Fund Limited
- Investors in the emerging markets and the Far East should be aware that this involves a high degree of risk and should be seen as long term in nature. Less developed markets are generally less well regulated than the UK, they may be less liquid and may have less reliable arrangements for trading and settlement of the underlying holdings
- Investment in warrants, participation certificates, guaranteed bonds, etc will expose the fund to the risk of the issuer of these instruments defaulting
Asian Total Return Investment Company
- The fund uses derivatives to achieve its investment objective. The way in which derivatives are used will increase the income paid to investors and reduce volatility, but there is the potential that performance or capital value may be eroded.
Schroder Oriental Income Fund Limited
- Deducting charges from capital can result in the income paid by the company being higher than would otherwise be the case and the growth in the capital sum being eroded. As a result of the fees being charged partially to capital, the distributable income of the company may be higher, but the capital value of the company may be eroded.
Schroder Japan Growth Fund plc
- The trust will invest solely in the companies of one country or region. This can carry more risk than investments spread over a number of countries or regions.
The views and opinions contained herein are those of Robin Parbook, King Fuei-Lee, Matthew Dobbs and and Andrew Rose and may not necessarily represent Schroders house view or views expressed or reflected in other Schroders communications, strategies or funds. The opinions stated in this article include some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee that any forecasts or opinions will be realised. The views and opinions may change. The article is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The article is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations.
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.
The sectors and countries mentioned above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
We recommend you seek financial advice from an Independent Adviser before making an investment decision. If you don't already have an Adviser, you can find one at www.unbiased.co.uk or www.vouchedfor.co.uk
Issued in May 2015 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority.