Why it pays investors to be selective in Asia
Asia is home to many of the world’s most dynamic and fast-growing economies. But investors who want exposure to this region’s long-term potential need to tread carefully - in Asia it pays to be choosy.
Asia is home to many of the world’s most dynamic and fast-growing economies. But investors who want exposure to this region’s long-term potential need to tread carefully - in Asia it pays to be choosy. In spite of its undeniably exciting prospects, few of Asia’s listed companies have the combination of qualities that makes them “investable” for us: in this part of the world, stock market indices are dominated by businesses we would not want in our portfolio.
Asia – from the giant economies of China and India to countries such as Singapore, Indonesia, South Korea, Thailand and even Australia (a major supplier of commodities to the region) – has never been an easy place to invest, and the challenge looks set to grow. The new US administration could rejig established international relationships across the region. The dollar’s strength could eventually spell trouble for those Asian companies that have borrowed heavily in dollars but must repay their debts in their own currency.
The great Asian catch-up goes on
At the same time, other things are unlikely to change: Asia is still forecast to be the fastest growing region in the world over the next few years according to the International Monetary Fund, with the economies of most countries outside Japan expanding their gross domestic product at 6%-plus per year, far ahead of projections for the developed world¹.
The spending power of many Asian consumers is growing and they are hungry for new technologies and innovation – more than nine out of ten Chinese in every age group say they are interested in using driverless cars for 90% of everyday situations, far ahead of the percentages recorded among US consumers². Asian countries outside Japan account for four of the world’s ten heaviest spenders on research and development as a percentage of economic output³.
So there are good reasons for Western investors to consider investing in Asian companies: over the next few decades, a region that today has more than half the world’s population and generates a third of its output, could expand much more rapidly than the West, propelled by high educational standards, a culture of hard work and saving, and a growing number of well-run and well-funded companies that can compete regionally and globally with the best. And as Asia’s share of the global economy grows to match its share of the population, its best companies could create a great deal of value for patient investors. Of course, it is important to note that exchange rate fluctuations will effect the value of your investments and that emerging markets generally carry greater political, legal, counterparty and operational risk.
What sets the best companies apart?
We favour investing in companies that are in a position to benefit from important long-term trends affecting the entire Asian region – trends such as urbanisation, automation, high-tech manufacturing, growing demand for consumer goods and healthcare, technology disruption, e-commerce and use of social media. Those we target must also have strong finances – a solid balance sheet and good cashflow – and high-quality, independent management (regular dividend payments are often a good sign).
Experience and first-hand knowledge are the keys to success
It takes effort and skill to identify outstanding companies, especially those that are still relatively small but have good growth prospects – Asian economies may be growing fast but this rising tide does not lift all boats equally. You have to know the terrain extremely well to identify companies with the right attributes. At Schroders, we have 40 analysts based in seven offices across Asia which gives us important access to companies in the region. This proximity to the markets we invest in give ours experienced fund managers valuable on the ground insights.
A lot of Asia’s future economic growth will take place in Asia. It sounds glib, but it’s an important point: to understand how Asian business and consumer markets are developing and to identify the themes to invest in – innovation, demographic change and technology disruption, for example – you need to be based in those markets.
Also, investors cannot simply rely on the financial information that companies publish. To invest successfully you also need to focus more on the “people issues” such as how the board operates, how independent and transparent the management is, how the company and its major shareholders treat minority investors, and whether local laws and regulations offer them decent protection.
Despite an uncertain outlook for the coming months and the challenges of identifying strong Asian companies with the right characteristics, Asia could provide strong investment opportunities for long-term investors. This will remain a complex and challenging region to invest in – and doubly difficult to address from afar – but those with access to seasoned investment managers with strong local ties could be best positioned to succeed.
Please remember that past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them can go down as well as up and investors might not get back the amount originally invested.
¹International Monetary Fund as at January 2017
²CB Insights, Roland Berger, September 2016
³World Bank, OECD, Macquarie Research, April 2016
This article is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Schroders has expressed its own views and opinions in this document and these may change. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. The forecasts should be regarded as illustrative of trends. Actual figures will differ from forecasts.
Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
Issued in March 2017 by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority. UK11612