Asia Pacific markets show their potential
David Prosser makes the bull case for emerging markets.
Are you familiar with the “Valeriepieris Circle”? It’s the smallest circle you can draw on a map of the Earth that will contain more than half the planet’s population. You’ll find the centre of the circle in Yunnan province, China, and it covers large parts of East Asia, South Asia and Southeast Asia. It’s a reminder of the huge structural advantages that the economies of the Asia Pacific region offer, with vast numbers of people, many of whom are now increasingly wealthy, middle-class consumers.
Financial advisers are once again getting interested in this part of the world. Some 36% of advisers have increased client exposures to emerging market equities over the past 12 months according to new data from Schroders UK. A third plan to raise allocations over the next year.
You can now build a case for investing in Asia Pacific equities on three distinct pillars.
David Prosser
That interest follows what you might call a lost decade for emerging markets and Asia Pacific equities in particular. Performance has often been lacklustre and sometimes downright dismal. Largely, that has reflected the strength of the US dollar, which has sucked in capital that might otherwise have been invested in the region; a marked slowing of China’s economic growth has also been a major headwind.
Now, however, emerging market bulls sense a turnaround is underway. The dollar has at last begun to weaken. And China’s government has recommitted to supporting its market economy – not least with a high-profile rapprochement between President Xi Jinping and leading technology companies earlier this year; the government had previously been tightening the regulatory screws on the sector.
In fact, you can now build a case for investing in Asia Pacific equities on three distinct pillars. First, valuations look attractive – while indices in the region are up 25% or so this year, well ahead of the US, these markets still trade at substantial discounts to their Western counterparts.
Second, the economies of many Asia Pacific countries have actually shown remarkable resilience. While the dollar’s dominance may have deprived of them of global capital flows, they’ve still been able to grow through the deployment of domestic and intra-regional capital. Countries such as Vietnam continue to outperform. Even China has offered growth rates that the West would jump at.
The third pillar is that the lower dollar provides an opportunity for resilience to develop into rebound. It should bring even more capital into the region, while reducing the cost of servicing both public and private-sector debt, which is often dollar-denominated. Plus a weaker dollar is often supportive of commodity prices, which is helpful for many emerging markets since they’re big producers.
Risks remain, not least from US trade policy. Still, President Trump’s trade tariffs, though challenging, do not appear to be high enough to counter the labour market advantages Asia Pacific countries enjoy.
No wonder financial advisers are taking another look, and my colleague Nick Britton has written about his enthusiasm for emerging markets in the latest issue of Spotlight.
Investment trusts active in the region are often their preferred vehicle for securing emerging markets exposure. That makes sense – in illiquid, volatile markets, the closed-ended structure of an investment trust is particularly advantageous.
Several emerging markets investment trusts also have significant exposure to private companies, where some of the best opportunities are to be found; again, that’s tricky with an open-ended fund structure.
In the long term, the promise of emerging markets is the potential for higher returns, albeit with volatility along the way, courtesy of those structural drivers. These are economies at an earlier stage of maturity with more room to accelerate. That promise has not been fulfilled over the past decade – but there is increasing optimism that better days are ahead.
David Prosser
David is former Business Editor of The Independent, Personal Finance Editor of the Daily Express, and Deputy Editor of Money Observer magazine. He writes regularly for the AIC.
