Three ways to invest in Asian equities

Asia is a fascinating place in which to invest. It’s home to hundreds of outstanding companies in some of the world’s fastest-growing countries. This means an impressive investment horizon of stocks in countries such as China, Korea, Singapore, India, Australia, Thailand, and the Philippines.

Asia is home to 60% of the world’s population (4.7 billion people)* and, with more and more people being lifted out of poverty, income levels across Asia are increasing and the middle class is growing and spending more.

The economic transformation of Asia is nothing new, having taken place over the past few decades. China has been one of its main drivers – expanding at something approaching warp speed – but the region’s powerhouse now faces a number of post-pandemic challenges, including rising inequality, environmental degradation, ageing population, geopolitical challenges and increasing regulatory pressures.

Step forward other regions like India, which have blossomed in recent years. India’s growth is a multi-layered story with strong demographics, growth, few geopolitical concerns, strong corporate governance, and a growing online economy. Taiwan is another country with strong market performance, due to the anticipated surge in demand for artificial intelligence services.

ASEAN markets were mixed in 2024. Singapore and Malaysia performed strongly, driven by strong banking earnings. Other markets such as Indonesia and the Philippines struggled amid tighter monetary policy.

Figures from the International Monetary Fund indicated that regional growth in Asia came in at 4.6% in 2024, with the region estimated to contribute roughly 60% of all global growth**. That is well ahead of growth in developed markets.

With this in mind, here are three ways to invest in Asia to diversify your investment returns.

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 so if you are unsure of anything please contact an expert adviser.

Asian Income

Asia is often thought of as a growth market, but it can play an important role for income investors in this new landscape. There are almost 10,000 dividend-paying companies in Asia ex-Japan***, accounting for roughly 12% of global dividends (double the amount offered in the UK)****. Perhaps most surprising of all is that 70% of Asia’s long-term equity returns have historically come from dividends^ – not growth.

Dividends tend to be lower in Asia on a company-by-company basis, but from growthier companies. Add in the growing middle class and increased wealth in the region and this number is likely to grow. Most importantly of all, significant progress has been made on corporate governance in numerous countries, with a view to offering shareholders greater income returns.

A good option here could be Guinness Asian Equity Income, managed by Edmund Harriss and Mark Hammonds. This fund is different because it invests in 36 equally weighted companies. This, together with their one-in, one-out policy, means there isn’t a long tail of smaller holdings, so each stock can make a meaningful contribution to performance. The fund currently yields 3.45%^^.

An alternative could be the Schroder Asian Income fund, which gives equity investors access to the higher growth Asian economies, excluding Japan, but including Australia and New Zealand. The fund currently yields 3.92%^^.

Ex-China portfolios

Regulatory concerns, coupled with geopolitical uncertainty, really have weighed heavily on Chinese equities. Challenges with China, coupled with the growing belief that it requires its own distinct allocation away from emerging markets, have resulted in a number of asset managers launching ex-China Asia/Emerging Market funds to distinguish between the two.

Others are taking advantage of the headwinds facing China. Mexico, India, Vietnam and other locations are replacing it across global manufacturing supply chains. The same names are also tapping into the waning of China’s export dominance.

Jupiter Asian Income manager, Jason Pidcock, sold his last remaining mainland China stocks in 2022, citing political concerns. He had previously been underweight the region for some time, citing lower expectations of corporate profitability relative to the rest of the region. The fund aims to yield 20% more than the respective benchmark. The portfolio is typically high conviction with between 30-50 stocks held, with a focus on large companies with reliable income streams.

An alternative here could be the Invesco Emerging Markets ex-China fund, a 35-45 stock portfolio invested across emerging markets (excluding China) which is diversified across markets and countries. 

Small-caps coming into focus

Small-caps are a vital part of the Asian growth story and inextricably linked to many long-term global trends. Asia is one of the few regions across the world where small-caps have materially outperformed large-caps over the past 3-5 years. Examples of trends boosting this segment include AI (where companies further down the supply chain have benefitted) and near-shoring - the aforementioned phenomenon whereby global companies diversify their supply chains away from China, with the aim of ensuring continuity and certainty of supply.

A fund to consider here from the Chelsea Selection is Fidelity Asian Smaller Companies, a value portfolio which taps into the 13,000 listed stocks in the region. The fund is well diversified with well over 100 holdings across many different countries in Asia.

*Source: Worldometer, figures to end of 2024
**Source: IMF World Economic Outlook, 31 October 2024
***Source: Matthews Asia
****Source: Janus Henderson Dividend Monitor, May 2024
^Source: Schroders, 16 February 2023
^^Source: FE Analytics, 19 January 2024

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.