Asian Equities: Why You Should Invest Now

Asia is a promising region for investors, with its markets offering a wealth of opportunities. The region is expected to experience robust growth, with emerging and developing Asia estimated to make up over one-third of global GDP today, outpacing the United States. This growth potential, coupled with the diversity and resilience of Asian markets, makes them an attractive prospect for investors looking to expand their portfolios.

Asian currencies, for instance, are predicted to outperform the US dollar, and the region's major markets, such as South Korea, Hong Kong, Taiwan, and China, are expected to be relative winners compared to their less developed counterparts. Additionally, industries like e-commerce, the internet, and China's new economy are likely to thrive in the post-COVID-19 era.

Moreover, Asian equity markets are less efficient than their developed counterparts, providing active managers with more opportunities to leverage in-depth research to identify mispriced securities. Investing in Asia also allows investors to tap into long-term structural developments, such as the shift from export-led development to consumption-led growth.

With its dynamic economies and growth potential, Asia presents a compelling case for investors seeking global diversification and the potential for substantial returns.

Asian currencies may outperform the US dollar

Asian currencies have a good chance of outperforming the US dollar over the next 18-24 months, according to Freddy Lim, co-founder and chief investment officer of StashAway, a Singapore-based digital wealth manager. This presents an opportunity for investment in the region, particularly for Asian investors who would otherwise face foreign exchange losses when investing in US dollar-denominated stocks.

Asian markets, such as Singapore, South Korea, Hong Kong, Taiwan, and China, are expected to be relative "winners" compared to their less developed regional counterparts. These markets have attractive valuations, lower exposure to commodities and oil, and have demonstrated resilience in coping with the Covid-19 crisis.

Additionally, industries with strong fundamentals that have been accelerated by the virus, such as e-commerce, the internet, and China's new economy, are likely to perform well. E-commerce-enabled companies have proven the robustness of their business models and can potentially reap the benefits of changing consumption behaviours in the future.

Asian fixed-income bonds have also performed well under governments' fiscal responses to the virus and provide important investment diversification. Therefore, Asian currencies have the potential to outperform the US dollar due to a combination of positive economic factors and the resilience of Asian markets during challenging times.

Asian markets are recovering from Covid-19

UBS Global Wealth Management has said Asia (excluding Japan) is the "only region" expected to produce positive equities earnings growth in 2020. Major Asia-Pacific markets were up as much as 49% from their March lows. This is an encouraging sign for investors, particularly those who would otherwise be hit by foreign exchange losses when investing in US stocks.

Singapore's Straits Times Index is an attractive prospect, offering access to "steady, high-quality names with a long track record of navigating past epidemics". Other industrialised Asian markets, such as South Korea, Hong Kong, Taiwan, and China, are also relatively strong compared to their less developed regional counterparts. These markets have proven to be better equipped to deal with the Covid-19 crisis, with lower exposure to commodities and oil.

E-commerce, the internet, and China's new economy are likely to do well. The companies in these sectors have proven their business models are robust and can potentially benefit from changing consumption behaviour in the future.

Asian small-cap companies are well-positioned for growth

Asian small-cap companies are often young, nimble, and fast-growing, making them well-positioned for long-term growth. They have the ability to seize market opportunities quickly and generate exceptional earnings growth. Their smaller size allows them to be more agile and adapt to changing market conditions, which is a key advantage in today's rapidly evolving business landscape.

Small-cap companies in Asia have historically outperformed their larger counterparts, particularly during phases of recovery after major market downturns. This trend is expected to continue, with the regional economic recovery in Asia gaining momentum, fuelled by vaccine-led optimism, ample liquidity in the financial system, and improving corporate earnings.

Asian small-cap companies also offer investors greater diversification benefits compared to traditional large-cap equity strategies. They have different country and sector weights, with more exposure to industries such as industrials, materials, real estate, and healthcare. By investing in small-cap companies, investors can access a larger opportunity set, as there are more small-cap companies in the region, many of which are relatively unknown and potentially overlooked by the market.

Additionally, small-cap companies in Asia tend to have higher family and management ownership, resulting in greater alignment of interests with minority shareholders. A strong, committed, and entrepreneurial management team can be a driving factor for success, especially for smaller companies that may have more limited financial resources and greater vulnerability to market changes.

Overall, Asian small-cap companies present a compelling investment opportunity for long-term investors seeking exposure to high-growth potential, diversification benefits, and the ability to identify hidden gems within the vast and dynamic Asian market.

Asian markets are volatile, but long-term investments pay off

Asian markets have been volatile in recent years, with investors deterred by difficulties in China, such as regulatory clampdowns and a zero-Covid policy. However, Asia's corporate sector continues to thrive, and the region has fewer long-term structural imbalances than many Western economies. This makes Asian markets an attractive prospect for long-term investors.

Opportunities in Asia

Asia is expected to produce positive equities earnings growth, with major Asia-Pacific markets up as much as 49% from their lows in March 2020. Asian currencies are also predicted to outperform the US dollar, making the region an attractive investment opportunity.

Where to Invest

Singapore's Straits Times Index is one attractive option, offering access to steady, high-quality names with a long track record of navigating past epidemics. Other industrialized Asian markets, such as South Korea, Hong Kong, Taiwan, and China, also look promising relative to their less developed regional counterparts.

Long-Term Growth

Asian markets, particularly China, have shown robust growth and compelling valuations. Funds are returning to emerging markets, and a weak AUD is good for absolute returns in an unhedged Asia portfolio.

Dealing with Volatility

Market volatility is inevitable, and trying to time the market is extremely difficult. A better strategy is to maintain a long-term horizon and ignore short-term fluctuations. While this can be challenging when watching your portfolio take a hit, historically, stocks have recovered from downturns and delivered long-term gains.

Investing in a Down Market

Some of the best times to buy stocks have been when things seemed the worst. Consistent investing can give you the discipline to buy stocks when they are at their cheapest, and it can also allow you to accumulate more shares when stocks are on sale.

Asian equities are less efficient than their Western counterparts

Asian markets have historically been less efficient than Western markets, due to a variety of factors. One key reason is the level of development; industrialized Asian markets, such as South Korea, Hong Kong, Taiwan and China, are more efficient than their less developed regional counterparts. This is evident when comparing the impact of the Covid-19 crisis on these markets. More developed markets were better equipped to cope with the crisis, and their industries with strong fundamentals, such as e-commerce and the internet, thrived. Less developed markets, on the other hand, may have been less resilient and more vulnerable to economic shocks.

Another factor is the correlation with Chinese equities. Certain Asian markets, like Japan and India, have a low correlation with China, which can make them more stable and predictable. This is similar to the relationship between the US and Chinese markets. Thus, investing in these Asian markets may offer a diversification benefit to investors heavily exposed to US or Chinese equities.

Additionally, Asian currencies are expected to outperform the US dollar over the next 18-24 months, according to Freddy Lim, co-founder and chief investment officer of StashAway. This is partly due to the tumbling US dollar, which has been affected by ongoing central bank stimulus. As a result, Asian-based assets could become more attractive for investment, particularly for Asian investors who would otherwise face foreign exchange losses when investing in US stocks.

Despite the inefficiencies, Asian markets offer a range of benefits for investors. Firstly, Asia represents one of the best long-term structural growth stories in the world. The region is home to over half of the global population, a third of global growth, a third of global exports, and a quarter of global consumption. Additionally, specific markets within Asia have delivered strong performance over the years, including India, Korea, Taiwan and Japan. These markets have outperformed or kept pace with US markets, despite the extreme US concentration in global indices.

In conclusion, while Asian equities may be less efficient than their Western counterparts, they still present compelling investment opportunities. The region's long-term growth prospects, strong market performance, and favourable currency outlook make it an attractive destination for investors seeking diversification and wealth-building opportunities beyond traditional Western markets.

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