Is Asia a good place to invest?

So, you’ve got a few investments, maybe a UK fund, maybe a European or a US one – where do you look to next? Investors seem to talk about the potential of Asia a lot: breakneck economic expansion; a burgeoning, spend-happy middle class; dreamy leaps in tech. 

You’ve heard of various Japanese companies and they seem pretty innovative, but then an ex-Nissan auto exec goes on the run claiming to be victim of a Japanese government conspiracy. Japan! I thought it was streets ahead! 

You heard impressive Chinese engineering firm Huawei was supposed to sort out our 5G, only for the Americans to get uppity about, yes you guessed it, the notion of more corporate meddling and another conspiracy: the government will backdoor their technology to spy on us!

Well come on then, what do Asian companies represent: future or foe? 

Here’s what you need to know.

What’s the story here?

Over the past three decades, under the guiding light of globalisation, and through a mix of urbanisation and industrialisation, economies of the Asia-Pacific region have boomed, wrenching one billion people out of poverty. As its private companies have blossomed and grown, so have the Far East’s global megastars: in total, Asia’s businesses now contribute $19trn in revenues to the global economy every year. 

So far, this remarkable journey has played out with Asia’s role as part of the orchestra; looking to the future, it will increasingly take on the role as conductor. Stocked full of opportunity, investors can’t afford to ignore it.

There was an Asian financial crisis though, isn’t it all quite risky?

Things have changed. In the 90’s, Asia was very reliant on exports and foreign lenders, linking them closely to the travails of western economies. It resulted in a financial meltdown in 1997 known as the Asian Financial Crisis. 

Nowadays, its foreign debt has been significantly reduced and its economic activity is increasingly fuelled by homegrown sources – private consumers – which have ‘de-coupled’ their economies somewhat from the west, making them much more stable and sustainable.

How significant is the region?

The Asia-Pacific region is BIG, at 4.6bn people, or around 60% of the global population. China, Japan and India all have economies far bigger than the UK’s. 

Broadly, McKinsey – a business consultancy – has lumped them into four groups in terms of scale and sophistication:

  • Advanced Asia – Australia, Japan, New Zealand, Korea, and Singapore are all advanced economies with sophisticated financial systems and tech, and high-end consumers.
  • China – just so big! Anchor to the rest of the region with trading talons in most markets.
  • Emerging Asia – Malaysia, Vietnam, Philippines, and Thailand are examples here. Well-connected markets within Asia, and suppliers of lots of growth potential, diverse cultures and cheap labour.
  • Frontier Asia & India – in terms of ease of trade and integration across global markets – there’s some work to do. These are very under-developed economies, but offer the ‘markets of the future’ and lots of growth potential for investors to tap into.

So how does this impact investing in the region?

It means there’s quite the variety to the sweet shop: varying levels of economic development offer different levels of risk for investors to chew on. Frontier Asia will carry much more risk than advanced Asia because identifying well governed companies with properly managed finances can be tricky and a bit of a minefield. In exchange? The potential for much higher shareholder rewards. 

The other advantage is the complimentary features of different markets. For example, China is now much less able than it was to compete on low-cost labour because incomes have risen and its middle-class has blossomed, but cheaper workers in other countries such as Vietnam, India and Bangladesh are able to pick up the slack.

Why should I invest in Asia right now?

1. Growth, please – we’re sluggish 

The region’s economies have a thunderous rate of economic growth – some in double-digit percentages – which are the envy of the western world which struggles beyond 2%. In 2000, Asia-Pacific represented around 1/3rd of global GDP (gross domestic product – a measure of value of economic activity). Today it represents 42%. By 2040 it will be 50% – that’s half of the world’s economic value!!

2. Exotic destinations

Asia gives you the opportunity to diversify in a geographical sense, with markets that have very different operations and end-consumers in comparison to western markets. This means if there’s issues elsewhere in the globe, for example the UK economy and the value of your UK investments are being pummelled, your Asian investments should be able counteract this impact as markets there are being influenced by very different factors. Remember though, some events affect ALL markets, so this isn’t always the case. 

3. Take note, people

The region’s companies now represent in 43% of revenues delivered by the world’s top 5000 companies. Even way over here there are Asian household names such as Tencent, Alibaba, Samsung or Toyota. Not to be sniffed at. 

4. Horses for courses

The driving force behind Asian economies are increasingly Asians. High levels of savings, growing incomes, and growth in areas of finance such as credit means plenty of room for private consumers to spend more. Strong domestic demand is the holy grail for economies – it’s why the US is top dog. 

5. Sit back & relax with…passive income?

There’s a view that if you want income from your investments i.e. the dividends they pay out to their shareholders, then it’s a good idea to look for mature companies in mature markets. It’s a broadly sound logic – the UK and the US are very strong markets for dividend income – but Asian companies have been playing catch-up and are increasingly rewarding their shareholders with income: 16% of global dividends now come from Asia. 

Tips to investing

  1. Active funds are a good idea as you want an expert selecting stocks in this region. Terrific companies are mixed in with total rubbish, so find a fund manager with the resources to be able to select winners.
  2. Check your fund has regional expertise. There’s a Chinese proverb: Crows first sense a rising wind, Ants first sense a flood. You need someone who understands the culture and markets the business operates in. 

Check your investments are protected against fluctuations in currencies – known as ‘hedging’ – as the value of currencies in less developed economies can bounce around all over the place and you wouldn’t want to lose gains in the value of your underlying investments to a depreciating currency.

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Marcus De Silva
Date published:
12 / 02 / 2020
Reading Time:
4 minutes