Asia, a region where many investors still hesitate to tread. But a region with opportunities. So what is the best way of balancing risk and reward in markets associated with both higher growth and higher volatility? Gabriel Sacks, co-Manager of abrdn Asia Focus, considers the respective merits of bottom-up and top-down stock-picking in Asia.
Financial turmoil often underscores the arguments for active fund management. The fallout from Liberation Day – to use the Trump administration’s already infamous term – served up an object lesson in this regard.
Indices plummeted. Passive strategies were left looking less attractive than they had in many years. The purported virtues of merely being the market were brought into sharp focus in spectacular, pension-eroding style.
Despite a subsequent recovery, the situation remains delicate. This is where the likes of yours truly should stride into the spotlight and deliver a compelling reminder of the appeal of trying to beat the market – which is to say now is the time to champion the wonders of diligent stock-picking.
Such an approach requires more than a little explanation, however. Investors are obviously entitled to know how and why specific holdings are chosen and what sort of thinking informs the overall process.
One point that might be of interest is whether stock selection is carried out from the bottom up or the top down. Particularly in the current climate, is it micro or macro considerations that prove decisive?
As the co-manager of a fund that invests in Asian smaller companies, I would have to say both enter the reckoning. We blend bottom-up and top-down analyses to produce what we might call a “pincer movement” method of identifying the brightest opportunities. Let me outline why each has a role to play in an investment era defined by uncertainty.
Bottom-up: in search of hidden gems
There has always been a good case for picking stocks on a company-by-company basis. This requires moving beyond the bigger picture and zeroing in on a business’s unique fundamentals.
In a region such as Asia, which contains a number of emerging markets (EMs), this degree of scrutiny may be especially useful. The paucity of coverage by mainstream investment analysts means an on-the-ground presence can be vital to the cause of unearthing hidden gems.
A quick comparison is instructive here. Hundreds of analysts follow the fortunes of the US’s large-cap and mega-cap businesses, while dozens monitor those in Europe and other developed markets.
The audience for small-caps, meanwhile, usually extends to no more than a handful. This is an issue even in Europe, where a smaller company is reportedly likely to be “eyeballed” by an average of just four analysts[1].
Coverage in Asia is even thinner. Countries such as India, the Philippines, Thailand and Vietnam are home to many small-caps whose promise is in danger of going entirely unnoticed.
This is why investment teams with local expertise can make a difference. In our view, first-hand knowledge of places, people, policies, practices and prospects are the essence of bottom-up investing.
Top-down: the growing importance of the bigger picture
Increasingly, though, another form of analysis is helping shape investment decisions. A region or country’s global standing is arguably a more significant piece of the puzzle today than it has been for some time.
China provides perhaps the most obvious illustration in Asia. Notwithstanding the easing of trade tensions with the US, one school of thought holds that it has been essentially uninvestable for years.
Yet China has adopted conspicuously pro-growth policies in recent months. It has introduced a raft of stimulus measures, openly promoted entrepreneurship and unequivocally encouraged businesses to strive for the cutting edge.
The launch earlier this year of AI-powered chatbot DeepSeek, which wiped billions of dollars from the value of the US’s leading tech stocks, showed the world’s second-largest economy should no longer be thought of merely as a “fast follower”. China has many tools for delivering long-term growth, regardless of how the interminable saga of tariffs eventually plays out.
By contrast, there are markets where political and economic events – along with their possible geopolitical and geoeconomic implications – have persuaded us to reduce our holdings of late. Although they tend to be tactical rather than strategic, such moves are crucial in strengthening portfolios’ defensive positioning when necessary.
Take Indonesia, which has exhibited great potential during the past few years. At present, amid concerns that the government’s populist pledges could lead to a budget blowout, we are carefully managing our exposure.
The best of both worlds
Successful investing is not just a question of racking up returns. It is also a question of mitigating situations in which the scope to generate returns might be adversely impacted.
To put it another way: successful investing entails managing rewards and risks alike. With smaller companies and EMs, both of which are associated with relatively high levels of growth and volatility, the importance of this balancing act cannot be overstated.
This is where a combination of bottom-up and top-down thinking can have real merit. It offers a means of ensuring investment decisions are as fully informed as they can be.
A notable corollary of the “pincer movement” approach, at least in our experience, is a higher turnover of holdings. Our fund engages in rather more trading now than it has in the past.
We believe this makes sense. In the face of uncertainty and volatility, the investment universe is there to be explored. Ideally, we like to hold a stock for several years – but we are not afraid to look elsewhere if circumstances require us to do so.
Ultimately, what matters is that we have confidence in our choices. Maybe more so now than for a long while, bringing together micro and macro insights is key to investing with conviction.
Main image: simon-zhu-4hluhoRJokI-unsplash
