Can you invest in Asia without backing China?

Following a regulatory crackdown by the Chinese government, that adversely affected companies in sectors such as technology, education and property, 2021 turned into an annus horribilis for anyone investing in the Chinese equity market.

The average China equity fund lost 10.7% over the year, while the MSCI China fell 21 per cent*. And 2022 has not started any better, with the Chinese stock market down some 17.5% year to date**.

With strict Covid lockdowns still in place, China’s economy is now facing its worst disruption since the beginning of the pandemic. Measures to contain COVID outbreaks have caused sharp declines in mobility and disruption to production, further hurting consumption and services. They are also intensifying global supply chain problems, making China’s zero-COVID policy one of the greatest risks to global growth.

Carol Liao, China economist at PIMCO, commented: “Given significant headwinds to the nation’s economic growth in the first half of this year, we have revised down our baseline GDP forecast for 2022 to mid-4%, with a wider forecast range to account for heightened uncertainties in both the Chinese and global economy.”

Can the market return to its previous successes?

Clearly there are plenty of obstacles for Chinese markets overcome. The first is the aforementioned Covid lockdowns. The second is geopolitical risk.

Tensions with the US remained elevated, as the US Securities and Exchange Commission (SEC) added over 80 US-listed Chinese companies to its list of entities facing possible delisting from US exchanges.

In another sign of growing tensions with the West, Bloomberg has reported that China has ordered central government agencies and state-backed companies to replace foreign-branded personal computers with domestic alternatives in two years.

“The overhaul marks one of Beijing’s most aggressive moves to date to reduce the country’s reliance on US technology,” T. Rowe Price said in an update.

Are there better opportunities in Asia?

Rob Brewis, co-manager of Aubrey Global Emerging Markets Opportunities, says that, since the fund launched in 2012, China has been experiencing its coming of age and has provided a good hunting ground for stocks. “But as China wrestles with the latest covid troubles, the rest of Asia, like much of the world, is emerging from its grip and with that has come the prospect of better growth and some interesting opportunities,” he said.

Among the other Asian countries the team has been finding opportunities are Thailand, Indonesia and Vietnam.

Thailand is still recovering from a lack of tourism during the pandemic, but medical tourism is returning faster. “Much of the clientele are middle eastern, where incomes are likely to be buoyed by current oil and gas prices,” said Rob. “The super-rich may still make for Europe and the US for a new heart or kidney, but there are many more who will travel to Bangkok, and Bumrungrad for similarly high-quality treatment at a substantial discount.

Rob says that further south, Indonesia has a rewarding combination of an appealingly large, young population of consumers, as well as abundance of some of the commodities we all seem to be struggling to find elsewhere.

“Vietnam is an economy which has proved resilient throughout the last few years of turmoil,” Rob concluded. “On balance, the government has charted a sensible course through covid, and it remains an attractive non- China destination for manufacturing dollars. Accessing the right stocks has and remains a challenge, but less so than in the past.

“The above together with a couple of positions in Korea and one in Taiwan have provided the opportunity to diversify from China (and exit LATAM) while still satisfying our challenging valuation metrics.”

Don’t forget India and Japan

India has been the preferred emerging market for the Chelsea research team for many years It's young, dynamic and entrepreneurial population, combined with business-friendly reforms in recent years and more infrastructure build means it has very exciting possibilities.

GS India Equity Portfolio and Alquity Indian Subcontinent are both on the Chelsea Selection. However, the Indian market had a great year last year, so the valuation is currently a little rich despite the market having come off a little year to date.
And of course, the other big Asian country is Japan!  “A lot of people forget this, and Japan is cheap and unloved right now,” commented Darius McDermott, investment advisor to the VT Chelsea Managed Fund range. “However, some foreign investor money is now starting to flow in and the economy is starting to reopen. Governance is improving, as are dividends and the country is well-placed in terms of technological developments. Chelsea Selection funds investing in Japanese equities include FSSA Japan Focus and Jupiter Japan Income.

*Source: FE fundinfo, MSCI China, total returns in sterling, calendar year 2021
**Source: T. Rowe Price, weekly market recap, 9 May 2022

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 commentators and do not constitute financial advice.

Published on 10/05/2022