It is some time since I last looked at East Asia as an investment option. Back at the end of 2007, the first waves of disquiet were already flowing through markets. Yet East Asia was holding up fairly well. And why not? Asian banks were not embroiled in the dubious lending practices that were to bring so many western financial institutions to their knees. The global economic slowdown was yet to gather momentum and the aspirant – and huge – populations of this region held out hope for the demographically-challenged West.
Some 17 months on, the picture looks different. The fast growing economies of China and India are slowing rapidly, yet they are still expected to turn in growth numbers that would be the envy of a western finance minister. But shares have retrenched smartly, leaving many investors uncertain over what to expect for the future. The promise of the past has evaporated, but is this an over-reaction from a world grown more risk averse or a reflection of the end of a trend?
Things have changed, that is for sure. Demand for manufactured goods from the region has fallen dramatically, as beleaguered consumers in America and Europe draw in their horns. And while a growing affluent middle class is in course of creation in Asia, it is clear they have neither the culture nor the clout to replace the newly poor Americans. Against such a background it is worth reflecting on whether this is merely a temporary setback or a sea change.
The cultural differences are certainly worthy of comment. For a start, the greater proportion of the population of this region has not participated in the massive rise in the standard of living enjoyed by their recently urbanised compatriots. Much of China, for example, still operates in an essentially rural environment, based around subsistence farming. One of the dangers faced by the Chinese government is the backlash from its poorer citizens, unable to join in with the prosperity enjoyed by those fortunate enough to have gained an early place on the industrialisation bandwagon.
But their cultural differences also come to their aid. These are nations that save and harbour their resources. This applies to governments as much as to individuals. The result is that they can truly afford to engage in stimulus packages, unlike many western governments that are having to prime the pumps of economic activity after bringing debt to an uncomfortably high level.
China, for example, is increasing its expenditure on infrastructure projects, in an effort to redeploy those workers no longer required to manufacture goods for export. New railways, new cities – all are planned and having their implementation expedited to counter the effect of falling demand from the rest of the world. At the same time, the massive surpluses built up in the years of plenty are helping to finance the debt-ridden Anglo-Saxon economies.
East Asia is not just China, of course, though it is this giant nation that has hogged the limelight over recent years. With the size of the Chinese economy now vying with Japan as the second most important in the world, it is little surprise that this is where much of the investment attention has focused. Indeed, China funds dominated the tables when I was compiling the runners and riders to the end of October 2007. They lie further down the field today.
They still feature, though. Gartmore’s China Opportunities fund, which was right at the top of the tables back then, still ranks no lower than second quartile even over the shorter time periods and maintains a place in the top five over three and five years. Jupiter China, Invesco Perpetual Hong Kong & China and Fidelity South East Asia all make a reasonable showing, even if their appearance at the top of the tables is less frequent.
The four First State funds regularly make the top five and maintain a consistent top quartile presence. Yet they did not appear amongst the leaders when I examined the tables to the end of October, 2007. And of those that were the stars then, two have clearly dimmed. Old Mutual Asian Select, a regular performance leader then, saw its ranking over one year drop to 58th, placing it firmly in the bottom quartile, though it has picked up more recently. Legg Mason Asia Pacific, meanwhile, is near the bottom these days.
The arguments that this region will continue to make ground over the more mature economies of the developed world still holds good. The financial strength of Asia, coupled with the ground that still remains to be made up as the vast populations out there improve their standard of living, suggests above-average growth will continue to be achieved. With the average fund falling by more than a third in the past year, much of the froth has clearly gone out of the market. If East Asia is not yet represented in your clients’ portfolios, perhaps now is the time to take a look.