Fund Calibre managing director Darius McDermott looks at the attraction of investing in Asian markets
China naturally dominates any talk about investing in Asia, and this has been especially true since its reopening last year. The vast continent is much more than even its biggest inhabitant, though, and when it comes to investment opportunities it’s worth hunting for gems hidden in the long shadow cast by Beijing.
Schroders has particular expertise in this area, with three Elite Rated Asian funds, Schroder Asian Alpha Plus, Schroder Asian Income, and the Schroder Oriental Income investment trust. Abbas Barkhordar, co-manager of Schroder Asian Alpha Plus, believes one sector where Asia has several very strong, globally-competitive companies is information technology.
Asia is the world’s fastest growing region and the centre of gravity for high-tech manufacturing, while investment in renewables remains supportive.
“Semiconductor manufacturing is a particular strength in Taiwan and South Korea, for example,” Abbas says, (an explanation of how he is positioning his fund more than investment advice). Several companies in those countries could potentially be beneficiaries of some long-term trends, he adds.
Abbas is thinking about areas such as 5G networks, artificial intelligence, electric vehicles, and the proliferation of smart, connected devices, “many of which require the most cutting-edge chips which are predominantly manufactured by Asian companies”.
The attractions of Korea
William Lam, manager of the Invesco Asian fund, is also a fan of Korea, believing the ‘discount’ applied to the country is largely unwarranted and overstates corporate governance concerns, geopolitical risk, and the cyclical nature of the economy, but means it’s definitely a market worth a closer look at.
He says: “While some doubt the effectiveness of top-down policy measures to improve governance standards, we are enjoying better access to senior management in South Korea and believe there is a sustainable positive long-term trend towards paying out more in dividends to shareholders, which should have positive implications for valuations.”
William admits North Korea is “an unpredictable neighbour” but believes South Korea’s geopolitical risk premium should be no greater than China or Taiwan’s. He also points out the Korean won has recovered some of last year’s weakness and thinks the currency can strengthen from current levels.
He says all this “presents an opportunity to own operationally solid companies, with good balance sheets, and an ability and desire to improve shareholder returns over time”. He has been adding exposure, driven more by conviction in the undervaluation of the stocks he holds, rather than to gain exposure to specific trends.
For example, William has bought more stock in memory chip companies such as Samsung Electronics and SK Hynix, with the reasoning that “with the industry going through a sharp downturn at present, valuations have fallen to more reasonable levels”, and anticipation of a bounce back soon.
He also favours LG Chem, the largest maker of EV batteries outside China, which is well positioned to benefit from US car companies looking to improve supply chain resilience.
“LG Chem also has a very promising business providing some of the chemicals and materials which go into EV batteries – a separately listed subsidiary trading at double the company’s market cap,” he points out.
Another fan of Korea is Jonathan Pines, manager of Federated Hermes Asia ex Japan, who says “the opportunities in Korea are just so fantastic. Valuations have come down dramatically over the past decade, while the companies have become stronger.”
Jonathan actually likes China too because stocks are trading on attractive valuations. But he says that the fund’s overweight to the country would be far greater if there were fewer geopolitical risks. In contrast he is underweight Taiwan as he believes earnings are due to go into a cyclical turndown.
What about India?
Of course, aside from China, Asia has another giant we have to talk about, India. India’s economy grew 6.1% in the January to March quarter – it can hardly be called ‘hidden’, but is India the new Asian investing hotspot?
“Indian stocks are often the greatest beneficiary when bearish sentiment dominates over China,” like now, says Edmund Harriss, manager of the Guinness Asian Equity Income fund.
India’s economy is forecast to grow over 6% a year in the next two years and corporate earnings are forecast to grow 14.2% a year over the same period. Chinese earnings are expected to be driven by the communication services, consumer, industrials, and utilities sectors, which India’s earnings echo, but with strong growth also evident in the property sector.
“The key difference is valuation,” says Edmund “The Indian market is trading on a multiple of 18.7x forecast earnings and at 17% premium to history which is significantly higher than China’s 9.6x multiple and 25% discount to history.”
So India is not the cheaper option for investors. But it also has fewer geopolitical risks. India’s relationship with Russia is similar to China’s, and its ongoing disputes with Pakistan and China could also have an impact, Edmund points out. But India’s economic and military position do not put it in such a confrontational position with the US.
Yet for investors looking to escape the current turmoil in China, India is no safe haven. Edmund is of the view both countries and markets exhibit very similar opportunity and risk profiles, but not necessarily rewards.
“Historically, China has mobilised economic resources more effectively than India,” he says. The fact is in 1978 the GDP per capita in both countries was around $300 – in 2022 China has grown to $12,700 while India’s has reached $2,300 but India’s population is growing while that of China has now peaked.
“The opportunities available in both markets are broad but for the present we think that China’s low valuations, availability of capital and physical infrastructure and its manufacturing scale make it our preferred market between the two,” he says.
Hidden gems in Asia are definitely worth diversifying into. But for investors in the region it’s fair to say China can’t be ruled out completely, even in favour of rival giant India.
