Asian Equities: A Guide To Investing In The East

Asia is home to over half of the global population, a third of global growth, a third of global exports, a quarter of global consumption, and over a third of global savings. It also boasts five of the ten largest major equity markets. With such impressive statistics, it's no surprise that investors are keen to explore opportunities in the region. In this paragraph, we will delve into the topic of investing in Asian equities, examining the diverse markets that make up this dynamic region, the benefits and risks associated with investing in Asian stocks, and the various investment vehicles available for those looking to gain exposure to Asia's economic growth.

Investing in Asian equities: ETFs and indices

ETFs

Exchange-traded funds (ETFs) are a great way to invest in the Asian stock market, offering broad exposure to the market at a low cost. There are currently 18 ETFs available that allow you to invest in a diversified range of Asian stocks. These ETFs differ significantly in terms of the markets and countries they cover, as well as the types of markets tracked (developed, emerging, or both).

When choosing an ETF, it's important to consider the total expense ratio (TER), which for Asia ETFs can range from 0.10% p.a. to 0.74% p.a. Here are some popular Asia ETFs:

• IShares MSCI EM Asia UCITS ETF
• Vanguard FTSE Developed Asia Pacific ex-Japan UCITS ETF
• Amundi MSCI Emerging Markets Asia UCITS ETF
• IShares MSCI AC Far East ex-Japan UCITS ETF
• HSBC MSCI Pacific ex-Japan UCITS ETF

Indices

Indices are another way to gain exposure to the Asian market. An index is a statistical measure of changes in a portfolio of stocks representing a specific market or industry. Here are some popular indices for investing in Asian equities:

• FTSE Developed Asia Pacific ex-Japan Index: Tracks large and mid-cap stocks from developed countries in the Asia Pacific region, excluding Japan.
• MSCI AC Asia Pacific ex-Japan Index: Tracks equity markets of emerging and developed countries in the Asia Pacific region, excluding Japan.
• MSCI Emerging Markets Asia Index: Tracks large and mid-cap companies from Asian emerging markets.
• Solactive Core Developed Markets Pacific ex-Japan Large & Mid-Cap Index: Tracks large and mid-cap stocks from developed countries in the Asia Pacific region, excluding Japan, and excludes companies involved in controversial activities.

Benefits of Investing in Asian Equities

Asia is home to over half of the global population and contributes significantly to global growth, exports, consumption, and savings. The region is at the forefront of key trends such as artificial intelligence, automation, energy transition, and the growth of the emerging market middle class.

Specific markets in Asia, such as Japan and India, have favourable economic conditions and are less correlated to Chinese equities, offering diversification benefits. Additionally, Southeast Asian markets like Indonesia provide opportunities to invest in the energy transition through their dominance in critical minerals.

Asian currencies and their potential to outperform the US dollar

Asian currencies have the potential to outperform the US dollar due to several factors, including interest rate differentials, economic growth, trade balances, and capital flows. Firstly, the depth of interest rate cuts in Asia is expected to be shallower than in the US, which narrows the interest rate differential against the dollar and could lead to further appreciation of Asian currencies.

Secondly, resilient economic growth in Asia, fuelled by strong tech-led export activities, increases demand for Asian goods. This strong trade performance acts as a tailwind for Asian currencies. In contrast, the US has a longstanding trade deficit. Additionally, lower inflation rates in Asia, with most regions nearing their central banks' targets, make the region's real yields more attractive to foreign investors, drawing capital flows into domestic financial markets and supporting the strength of Asian currencies.

However, it is important to note that currency direction is influenced by multiple factors, and potential risks to the strength of Asian currencies include volatile food prices in India and elevated housing prices in Taiwan and South Korea. Additionally, changes in trade policies arising from the upcoming US presidential election could impact the demand for Asian goods.

When investing in Asian equities, it is beneficial to consider companies with a higher portion of revenue derived domestically, as they tend to be leaders in earnings growth. A stronger domestic currency reduces their import costs, positively impacting their performance. On the other hand, export-oriented companies may experience limited adjustments as global growth cools, but they can benefit from currency appreciation on the total return basis.

Overall, Asian currencies appear attractive against the US dollar due to their relative valuations, slower rate cut expectations, positive trade balances, and resilient economic growth. By diversifying across various asset classes, investors can gain exposure to the appreciation of Asian currencies while also managing risk and constructing a well-rounded portfolio.

Top markets for investing in Asia

Asia is home to some of the world's largest and fastest-growing economies, making it an attractive prospect for investors. Here is an overview of the top markets for investing in Asia:

Japan

The Japanese stock market is highly developed and plays a leading role worldwide. Japan is considered one of the most investor-friendly Asian markets. The Tokyo Stock Exchange (TSE) is the largest exchange in Japan and the second-largest in the world in terms of market capitalisation, with over 2,000 businesses listed. Japan is excluded from most indices covering Asian markets due to its prominence.

China

China is a global leader in consumption, innovative technologies, and manufacturing. The Shanghai Stock Exchange is one of the newest in the world, with 1,500 companies trading. However, it's important to note that foreign investors should be aware of restrictions on share ownership.

India

India has favourable demographics and economic policy reforms, which have sustained its track record of elevated economic growth. India is expected to see millions join its middle class in the coming decades, which will propel growth in niche industries. The Bombay Stock Exchange (BSE) is Asia's first stock exchange, established in 1875, and it lists nearly 6,000 companies.

Taiwan & South Korea

These markets have delivered equity market returns above what their low economic growth would suggest, largely due to their focus on technology. They are key beneficiaries of the artificial intelligence transformation.

Southeast Asia

Countries like Indonesia, Vietnam, and the Philippines are among the fastest-growing economies in the world. Indonesia, in particular, offers investors an opportunity to invest in the energy transition through its dominance of critical minerals used in this process.

Hong Kong

Hong Kong is recognised as one of the premier financial centres in the world, with economic stability and growth. It has a strategic location, strong regulatory framework, and a skilled and educated workforce. Hong Kong also serves as a gateway to China and the rest of Asia.

Singapore

Singapore is a leading business hub in Asia, known for its business-friendly environment and strong economic infrastructure. It has an attractive tax regime, with no taxes on capital gains or dividend income. Singapore also has a multilingual talent pool, making it easier for foreign companies to integrate.

Malaysia

Malaysia has a steadily growing economy and is an evolving financial centre in Asia. It offers a well-educated and skilled workforce, with a significant portion being multilingual. The government provides investment and tax incentives to high-technology companies and innovative sectors.

Thailand

Thailand has a growing economy and business-friendly policies, making it attractive for foreign investors and multinational corporations. While there may be a language barrier, Thailand offers good infrastructure and cheap start-up costs for new businesses.

Other Markets

Other Asian markets that are worth considering include Indonesia, the Philippines, and Vietnam, which have been experiencing rapid economic growth.

Asian fixed-income bonds

When considering investing in Asian fixed-income bonds, it is essential to understand the risks and opportunities presented by the diverse economies and markets in the region. For instance, Japan's return to inflation and positive interest rates, along with ongoing corporate governance reforms, makes it an attractive investment destination. India's favourable demographics and economic policy reforms are expected to sustain its track record of elevated economic growth. Meanwhile, markets like Taiwan and South Korea have delivered strong equity market returns due to their high weightings in the technology sector.

One way to invest in Asian fixed-income bonds is through exchange-traded funds (ETFs). ETFs offer a cost-effective way to gain exposure to the Asian bond market by tracking a diversified index. When choosing an ETF, it is important to consider the total expense ratio (TER), which typically ranges between 0.10% p.a. and 0.74% p.a. for Asia ETFs. Additionally, it is worth noting that Japan is often excluded from most indices covering Asian markets due to the availability of specific Japan ETFs.

Another option for investing in Asian fixed-income bonds is through mutual funds or unit trusts that focus on the region. These funds typically have a portfolio of bonds from various Asian countries, providing exposure to both emerging and developed markets. When considering a mutual fund or unit trust, be sure to review the fund's prospectus and offering materials to understand the risks and fees associated with the investment.

It is also worth noting that some companies offer specific fixed-income bond funds for the Asian market. For example, BlackRock offers the BlackRock Asian High Yield Bond Fund, which seeks to maximise total return by investing in high-yield fixed-income securities from the Asia-Pacific region.

Before investing in Asian fixed-income bonds, it is crucial to conduct thorough research and due diligence. Consult with a financial advisor or expert to ensure that you fully understand the risks and potential rewards of investing in this diverse and dynamic region.

Active vs passive investing in Asia

There are two main approaches to investing in Asian equities: active investing and passive investing. Both have their own advantages and disadvantages, and it's important to understand the differences before deciding which approach to take.

Passive Investing

Passive investing involves buying and holding investments over a long period, with minimal portfolio turnover. This approach is often associated with low costs, as it doesn't require active management fees. Passive investors typically invest in index funds that track a broad market index, such as the MSCI Japan or the Nikkei 225 for the Japanese market. This type of investing is prevalent among retail investors due to its low fees and simplicity.

The advantages of passive investing include:

• Ultra-low fees: Passive funds have lower fees because they don't require active management and simply follow a specific index.
• Transparency: It is clear to investors which assets are included in a passive fund.
• Tax efficiency: The buy-and-hold strategy of passive investing typically results in lower capital gains tax.

However, there are also disadvantages to passive investing:

• Limited flexibility: Passive funds are limited to a specific index or set of investments, providing less flexibility to adapt to market changes.
• Smaller returns: Passive funds are designed to track the market, so they rarely beat it and may result in smaller returns compared to active investing.
• Reliance on the index: Passive funds follow a predetermined index, so their performance is closely linked to the chosen index's performance.

Active Investing

Active investing, on the other hand, involves a more hands-on approach, where a portfolio manager actively buys and sells investments based on their short-term performance. This approach aims to beat the average market returns and capitalise on short-term price fluctuations. Active investing requires deeper analysis and expertise to make timely decisions about buying and selling specific stocks, bonds, or assets.

The advantages of active investing include:

• Flexibility: Active managers can buy stocks beyond a specific index, allowing them to find hidden gems.
• Hedging: They can also use various techniques, such as short sales or put options, to manage risk.
• Tax management: Active managers can tailor tax strategies to individual investors, such as offsetting taxes on winning investments with losses from others.
• Adapting to market conditions: Active managers can quickly adapt to adverse market conditions, such as shifting positions during a bear market.

However, there are also some disadvantages to active investing:

• High expenses: Active investing involves higher fees due to the extensive research, analysis, and transaction costs involved.
• Active risk: Active managers have the freedom to buy any investment that meets their criteria, which can lead to higher risk.
• Management risk: Human fund managers can make costly mistakes.

The choice between active and passive investing depends on various factors, including an investor's risk tolerance, investment goals, and preferences. Passive investing is generally more suitable for those seeking a simple, low-cost approach, while active investing may be preferred by those willing to take on more risk and pay higher fees for the potential of higher returns.

Additionally, the type of investments can also influence the choice between active and passive management. Passive management is often recommended for well-known, easily traded holdings, such as stocks in large corporations. In contrast, active management may be more advantageous in niche markets like emerging markets or small-company stocks, where less liquidity and lower visibility provide opportunities for active managers to find undervalued investments.

Ultimately, many investment advisors advocate for a blended approach, utilising both active and passive strategies to diversify a portfolio and manage risk effectively. This combination can help investors take advantage of the strengths of both methods and navigate volatile market periods.

Frequently asked questions