Uncertainty over China has put some people off Asia in recent years, but long-term investors ignore the region at their peril. In my view, recurring themes of young populations, growing middle classes and well-educated masses make the potential returns worth a bit of extra risk.
Over the next 20 to 30 years, I think it's safe to say Asia will be a key global growth driver. If not the key driver. If you're building a long-term portfolio for retirement, it doesn't make sense not to have some exposure. It's an exciting region, with innovation and opportunities that other parts of the world simply don't have.
The Asia Pacific, even ex Japan, is a big place, with some 60% of the world's population, and the funds investing in the area will differ greatly. Some will concentrate more on developed markets, in which they may include Australia, New Zealand and Singapore. Australia, in particular, is known for its high dividend payouts and the country can be a good core contributor to the income component of a portfolio.
Other funds focus on the growth potential of Asia's emerging economies. Obviously these will bring different potential benefits, and risks, to your investments. Keeping on top of the general trends will help you to decide what's right for you.
Yes, the region as a whole is likely to be impacted by China's slow down. But in some cases, other Asian countries stand to benefit. The ASEAN nations—a coordinated organisation of South East Asian countries—are already taking advantage of changing dynamics. As China's wages, land values, taxes and currency have risen, so too has the cost of large-scale manufacturing, where its factories have long had a competitive edge. Nowadays, shoe makers, textile manufacturers and garment producers are setting up shop in cheaper countries like Vietnam and Indonesia.
Not to mention the support ASEAN is getting from countries such as Japan and the US, who have both political and economic motivation for backing another power centre in the region. Meanwhile in Asia's other powerhouse economy, India, domestic factors are more than capable of driving growth regardless of what happens further afield.
Despite these promising factors, Asia ex Japan stocks still look 'cheap' in terms of valuations at the moment. India is one of the few markets that is regularly considered 'expensive' (because of the high quality of its companies) but broadly speaking, now could be a good time to get into Asia from a price perspective.
Elite Rated funds exploring themes outside China include JOHCM Asia Ex Japan, which is underweight China relative to the index but overweight Taiwan, India, Indonesia and the Philippines1. Its Singapore-based managers, Samir Mehta and Cho-Yu Kooi, believe the Taiwanese corporate culture has improved significantly in recent years, making it now an attractive market that is cheaper than its long-term average.
Samir and Cho-Yu are seeking out dynamic and return-focused companies in Taiwan. In an April note, they gave an example of manufacturers Taiwan Paiho, whose innovative research and development efforts in creating components for sports products have delivered rising margins and top line growth.
Given the volatility that can come part and parcel with investing in this region, I particularly like the managers' focus on avoiding capital losses for investors. The fund has historically been less volatile than its peers.
I also like the Elite Rated Stewart Investors Asia Pacific Leaders, which holds a very small China holding at just 1.5% of its total portfolio. It too, is overweight Taiwan by contrast, as well as Hong Kong2. Investors have been well rewarded over the past ten years by managers Angus Tulloch and David Gait's concentrated approach. Around 40% of the fund's value is in its top 10 holdings.
Another fund to look at is the Elite Rated Schroder Asian Alpha Plus. Its manager, Matthew Dobbs, typically invests in large companies and has quite a similar level of volatility to the index, although he has delivered superior returns since launch. Also underweight China relative to the index, and overweight Hong Kong. For those wanting ASEAN exposure, Matthew also holds smaller percentages in Thailand, Indonesia, the Philippines and Malaysia3.