INVESTING IN ASIA:
IT CAN BE VOLATILE BUT IT’S STILL A COMPELLING STORY
By James Malliaros
The global economy is tied in large part to growth in Asia, where nearly two-thirds of the world live. The core thematics underpinning the growth opportunities in this part of the world include the rising Asian consumer, digital disruption in Asia, structural reform in India and capital market liberalisation in China.
Asia was the place to be for emerging-market investors in 2017, but a number of issues and geo-political events so far this year has resulted in Asian markets, particularly China, correcting significantly in 2018. As can be seen in the graph below, the Shanghai Composite Index has significantly underperformed the US S&P 500 since the beginning of 2018.
Shanghai Composite vs S&P 500
The sell-off in October and November was broad-based, with all sectors within the Chinese Index recording negative returns. Three factors coincided to create the prefect storm for Asian share-markets:
- The escalating US-China trade tension
- Signs of a consumption slowdown, particularly in China, started to emerge
- Finally, a strong US Dollar and rising US interest rates have been a negative for emerging market shares
As a result of the correction in 2018, Asian markets are currently at very attractive valuations. There are a few important catalysts potentially on the horizon that may allow Asian markets to reverse direction and make up for some the losses incurred so far this year.
First, the much anticipated meeting between Presidents Trump and Xi at the G20 in Buenos Aires was successful with the leaders agreeing to halt new tariffs and the US agreeing to leave the tariff rate on the existing $200 billion of goods at 10% for 90 days rather than increasing the rate to 25% on 1st January.
The second possible catalyst is the statements by the US Federal Reserve Chairman last week which suggested that US rates are now near neutral, provide relief from the pressures of a stronger US Dollar and rising interest rates, a positives for Emerging Markets as an asset class.
For longer-term capital appreciation where population demographics are in your favour, then we recommend investing in emerging markets like China and India. Whilst emerging markets provide diversification benefits for investors, they also carry their own geopolitical and currency risks, as well as the risks of holding a concentrated portfolio position.
Therefore, it is important when investing in emerging markets like Asia that you use a manager experienced investing in the region.
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