24th May 2017 by Darius McDermott
While investors eyes have been on the US and UK stock markets continuing to reach new all-time highs, Asian stock markets have also been enjoying a positive run in 2017, recording their best year-to-date performance since 2009.
Encouragingly, overall, and notably for Taiwan and South Korea, earnings forecasts have been revised upwards due to stronger economic data. This, combined with a considerable valuation discount to global markets, suggests there could be more to come and that, as investment opportunities go, Asia is one of the better ones on offer today.
We’ve seen positive changes in Japan. Shinzo Abe came to power four and a half years ago, finally giving the Japanese a period of consistency: the six leaders before him had lasted for little more than a year in most cases, and even less in one. He’s also had enough of a majority to help him start some much-needed economic reforms, which were dubbed Abenomics. While progress here has slowed, a lot has already been achieved. Importantly, wage inflation is finally starting to come through, after a generation without it, and consumer confidence is approaching a four-year high.
In 2015, Narendra Modi became prime minister of India. Like Abe, he gained a rare majority and has been able to start transforming a very messy democracy. Inflation has been brought under better control, the country’s finances are healthier and red-tape has been reduced. There have been a few hiccups along the way – demonitisation last year, and the withdrawal of some notes in a cash society, caused a few issues – but the economy seems to have recovered and Indian stocks have posted the strongest year-to-date return of any major emerging market country.
Some political changes have been less positive, such as Kim Jong-un in North Korea, but south of the border, another positive electoral change occurred.
Ending a decade of conservative rule, and months of political turmoil with a presidential scandal and subsequent impeachment, South Koreans elected a human rights lawyer, Moon Jae-in, as their new president. Voter turnout was the highest in 20 years, with 77% of the voting population having their say. It could be quite a milestone for the country and Asian fund managers are viewing the victory optimistically.
Matthews Asia Pacific Tiger fund managers commented recently: “Korea has high education levels, globally competitive businesses, a well-diversified economy and a strong fiscal balance sheet. Voters are likely to hold Moon accountable for pushing through his reform-minded agenda that seeks to improve transparency and curb the concentration of economic power in the hands of large, often family-owned conglomerates whose ties to government were exposed during the Park drama. We continue to see positive growth prospects for the Korean economy.”
Sentiment towards Asian equities has been very negative for some time but, having fallen out of the the top ten selling sectors for our clients in the 2015/2016 ISA season*, they made their way back up to fifth position in the last ISA season year**.
Risks remain – trade barriers in particular. The anti-China rhetoric from Donald Trump has abated somewhat, but China itself, which is the world’s second largest economy, still faces its own internal challenges as it transitions to a service-led economy and reforms its financial system.
However, without wanting to state the obvious, Asia is a big place. It is the largest and most populous continent in the world comprising around 50 different countries, and it is home to more than 4.5 billion people and more than 25,000 listed companies. There are bound to be any number of good, long-term investment opportunities.
Funds investing in Asian equities that I think are worth a look include: JOHCM Asia ex Japan and Jupiter Asian Income, or Baillie Gifford Japan Trust and Schroder Tokyo for investors wanting more Japanese exposure.
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. Darius’s views are his own and do not constitute financial advice.
*Source: Chelsea Financial Services ISA investors, March 2016
**Source: Chelsea Financial Services ISA investors, March 2017