Asia Pacific: accessing multiple markets in one

Asia Pacific is home to some of the fastest growing economies across the world. In 2024, it is forecast to grow at almost 6x the rate of Europe*. However, the region also has considerable variation, and this has been reflected in stock market performance over the past 12 months, with China’s weakness a notable contrast with India’s strength. This means Asian investment comes in a range of flavours.

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and, if you are unsure of anything please contact an expert adviser.

Recent performance looks unexciting. The MSCI Asia ex Japan has delivered 4.4% over the past year, against a return for the MSCI World of 23.8%**. Nevertheless, investor returns may have been very different depending where their manager chose to invest. China (29.3% of the index**) has been a disaster – with the MSCI China dropping 16.9%**. India (20.6% of the index**), on the other hand, has had an extraordinary year, with the MSCI India rising 39.4%**, and the small and mid cap sectors doing even better.

Between these two behemoths are the semiconductor companies of Taiwan and South Korea. TSMC and Samsung Electronics are a large part of Asian indices (14.4% of the MSCI Asia ex Japan between them**) and their fortunes can be a significant influence on Asian markets. Then there are Asia’s real ‘emerging’ markets – Thailand, Indonesia, the Philippines and Indonesia. These display another set of characteristics again – higher risk, but potentially higher return.

Investors could have a manager that focused on any one of these four areas, which means there has been a vast disparity in performance between funds, even over a single year. The worst fund in the IA Asia ex Japan sector is down 11%, while the best-performer is up 17%***. As might be expected, the top-performers have generally swerved China, focused on India and/or key parts of the technology market, such as semiconductors.

A variety of approaches

For example, Chelsea Core Selection fund, Jupiter Asian Income, is third in the sector over one year, and is currently top quartile over three and five years***. Manager Jason Pidcock has made no secret of his antipathy to China. He sold out of his last China holding in July 2022 and has not plans to buy back in even though the market has got cheaper. He sees it as akin to investing in Russia or North Korea in terms of geopolitical risk. Instead, his focus has been on countries such as Australia, which – he points out – has materially outperformed China over the last five years****. The Jupiter fund has also been more exposed to markets such as Taiwan, India and Singapore and its income mandate gives it a natural defensiveness.

However, there are also options for investors who want something a little racier. A fund such as the Schroder Asian Alpha Plus, run by Richard Sennitt, has more of a growth flavour. The fund holds positions in China, but is underweight and largely invests through Hong Kong listed stocks, where valuations are generally lower, and shareholder returns more of a focus for management teams^.

He is careful on valuations: “In India, valuations appear elevated in many sectors, most notably in the mid/small-cap segment. That said, we continue to see attractive longer-term fundamentals in areas such as private sector banks and IT services stocks, which remain core positions in the fund.” He is also careful on governance, making sure that companies are taking care of their shareholders.

A sustainable option

This focus on governance is also a notable feature of the Stewart Investors Asia Pacific Leaders Sustainability fund. This is the only specialist sustainability fund on the Chelsea Core Selection. Managers David Gait and Sashi Reddy invest in 30 to 60 high-quality businesses across Asia. These businesses must be helping bring about a more sustainable future and the managers will actively engage with companies to improve performance. The fund explicitly avoids companies linked to harmful activities, such as fossil fuels, nuclear energy and alcohol production.

This can be a compelling strategy in Asia, introducing an important quality control function. Its portfolio is an eclectic mix. Recent investments have included WuXi Biologics and Samsung Biologics^^ – this branch of medicine targets specific parts of the immune system to treat disease. Healthcare is currently the fund’s largest overweight at 21.1% of the fund, compared to just 5% for the index^.

There are also some exciting technology stories in Asia, often with similar growth potential to their US peers, but at lower valuations. William Lim, manager of the Invesco Asian fund says he continues to have significant exposure to dominant semiconductor companies in Taiwan and Korea. “Excitement surrounding AI-related demand persists, but it seems to us that the level of semiconductor demand required to support the growth of AI has not been fully priced into some of the mega cap Asian tech stocks.” The semiconductor sector has dealt with its over-supply problem and has seen a significant bounce since the start of the year.

Equally, some of the ‘emerging’ Asia economies look to have an exciting growth trajectory – Vietnam, for example, is a significant beneficiary of shifting global supply chains across the world, while Indonesia has also seen an economic renaissance in recent years. The Schroder Asian Alpha fund, for example, has over 8% invested in smaller markets such as Vietnam, Indonesia and Thailand^, which allows it to participate in their growth.

Asia’s growth is exciting, but there are a number of ways to access it, from a steady-eddie approach focused on the region’s developed markets, to a range of growth options based on the region’s emerging markets or technological prowess. Investors will need to decide which flavour suits them best.

*Source: World Economic Outlook Updated, January 2024
**Source: MSCI index factsheet, 29 March 2024
***Source: FE fundinfo, data at 8 April 2024
****Source: Investing on the go podcast, 20 April 2023
^Source: fund factsheet, 29 February 2024
^^Source: Stewart Investors, strategy updated Q4 2023

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.