Sector Focus: What next for the Asia Pacific sector?

The news that China has further reduced its forecast for economic growth for the current year prompts a revisit to the important Asia Pacific ex Japan sector. Let’s face it – the reduction is hardly major, with growth for 2017 now expected to be in the region of 6.5 per cent. But the announcement was accompanied by some cautious remarks. Clearly the election of Mr Trump to the White House has raised the spectre of a more protectionist approach in world trade, while pollution levels in China were also cited as an issue.

It is nearly two years since I last looked at this sector. Back in 2015 markets had gone into reverse in the region, spooked by China’s attempts to devalue its currency and by the administration interfering in the stockmarket. This had resulted in significant investment outflows and encouraged a more cautious stance. Yet things did settle down and positive performance has reasserted itself, despite continuing uncertainties, exemplified by the rhetoric employed by President Trump as he endeavours to create jobs at home.

In practice it seems unlikely that any major changes in the nature of the trading relationship between the US and China can take place any time soon. Many technology companies in particular rely on inexpensive production from the region, while a burgeoning Chinese middle class is becoming an important component in global consumerism. And, of course, the Asia Pacific region is not solely about China, though it is hard to ignore the world’s second-largest economy.

Still, with the world’s most populous nations in this region still lagging the developed world in terms of prosperity, there is reason to expect above trend growth to continue for the foreseeable future. India, as an example, has a population that exceeds one billion and is expected to overtake China in just a few decades. The 1.3 billion people that live there are getting younger and their middle class is growing too. What is more, Indian per capita Gross Domestic Product is some way behind that of China, so there is even more ground to be made up.

While investing in this region is not always straightforward, the opportunities are undeniably exciting, even if timing can be something of an issue. Political instability has often been cited as a concern, but more recently there have been few upsets. And with large nations like Indonesia, Thailand and South Korea in the region, there seems every reason to believe that somewhere progress will be being made at a more rapid rate than in the developed world. While there are demographic challenges to be met, the youth of much of the region and their strong work ethic promises to hold them in good stead.

As for the funds that provide access to these markets, I find parallels can be drawn with what I discovered back in 2015. Now, as then, few of the funds that were making the running have remained at the top of the tables. JOHCM and Fidelity have funds that appeared last time, but many of today’s frontrunners did not feature two years ago. Moreover, there is a marked lack of consistency in the tables, with three of the top five over five years dropping to fourth quartile over the shorter time frames.

Two funds are worthy of a mention, though, for bucking this trend. Old Mutual Asia Pacific and Invesco Perpetual Asian remain in the top quartile over all four time periods reviewed. Indeed, the lowest place registered by the Invesco Perpetual fund is sixth over five years. The Old Mutual fund only drops out of the top 10 once, when it came in at number 12 over three years.

There is rather more consistency at the bottom end of the tables, where New Capital Asia Pacific Equity Income is bottom or next to last over all periods. Elsewhere, funds often drift up and down the tables, demonstrating how difficult it can be to find the right fund to back. Remember, this is a vast region with a positive cornucopia of companies from which to choose, so understanding the approach a manager is taking can be crucial.

It is tempting to adopt a bias towards the direction a particular market or group of markets is travelling. Certainly, the Asia Pacific sector has enjoyed more robust performance of late. But then, so has North America and Europe. What is different is that valuation levels look relatively less challenging, so managers have a greater degree of choice in their selection of individual companies. And the original premise that this region must, over time, make up ground on the rest of the world still holds good.

Key Takeaway

The populous countries of the Asia Pacific region continue to offer exciting prospects for the future. Valuation levels, which are presently not too demanding generally, need to be watched, though, and it is important to recognise that individual countries in this region do not necessarily move together. It remains, though, an important constituent of any growth portfolio.