Low valuations and growth opportunities mean that Asia is an attractive investment prospect that’s being overlooked, according to Canada Life Investments’ David Marchant and Premier’s Simon Evan-Cook.
Since the start of the year, the MSCI Emerging Markets Asia index has outperformed both the S&P 500 and the FTSE World indices by 3.21 and 0.95 percentage points respectively, delivering returns of 6.2 per cent.
Performance of indices in 2015
Source: FE Analytics
However, Asia and emerging markets have paled in comparison with developed markets such as Europe and Japan, which have deployed aggressive quantitative easing and have seen their markets jump as a result.
Performance of indices in 2015
Source: FE Analytics
These areas of the market have become so popular recently that FE Trustnet explored whether investing in them is a consensus trade that investors should be looking beyond.
In an article published earlier this month, a panel of financial experts agreed that Japan and Europe are still solid regions to invest in, despite their overwhelming popularity.
Psigma’s Tom Becket still favoured both areas due to their better potential medium-term value than the US, which he said is starting to play out quite strongly. 
“I think there are good reasons why that can continue. Broadly, we think that most investors are still talking the talk rather than walking the walk when it comes to European and Japanese equities, and there is still considerable amounts of further buying that can take place,” he reasoned.
However, Evan-Cook (pictured), who is a member of Premier’s multi-asset team, believed that the focus on developed markets has detracted from attractive investment opportunities in emerging markets, particularly Asia.
This view has since been supported by Canada Life Investments chief investment officer David Marchant, who continues to see stellar opportunities in the region and particularly China, which is a region he has been bullish on for a while.
“There are lots of stories about weakening growth in China, but if you look at the market this year, Chinese equities are up more than 40 per cent year-to-date – you hear less about that,” he said.
Performance of index in 2015
Source: FE Analytics
“While there are risks in China – the level of debt there is a problem and their population is aging – there’s a lot of reform opening up in the markets that is beneficial for the Chinese stock market.”
“Actually, if you look at which markets have done well this year it’s China, Europe and Japan. All three areas have stimulatory monetary policies. The UK and the US much less so.”
In Canada Life’s Global Market Outlook report released at the end of last year, Marchant predicted that the Canada Life Asia Pacific fund would outperform in 2015 due to the amount of structural change that the region has undergone in recent years.
So far this year, this has proven to be true with the £117m fund comfortably outperforming its sector and benchmark.
Performance of fund vs sector and benchmark in 2015
Source: FE Analytics
However, Marchant also admits that Asia and China specifically are highly volatile areas of the market to invest in and might not suit every investor’s stomach for risk.
“Over the last 20 years, people have been saying that you’ve got to invest in emerging markets because valuations are low, growth is higher, but then more people have piled in there,” he explained.
“You’ve got to remember that there are times when Asia does struggle – the whole market is more volatile, the companies are younger and perhaps the management is less experienced, they’re very dependent on export markets.”
“People are realising it’s a higher risk area to invest in – it’s not a one-way bet.”
Evan-Cook agrees that it isn’t a good idea for investors to place all their eggs in one basket and, as such, would not recommend focusing heavily on a specific region such as China in terms of portfolio allocation.
“I would say it’s probably too dangerous to take a market-wide approach. One thing I would definitely not be doing at the moment is buying an A Share tracker, for example, because there’s a lot of overheating and frothiness in parts of the Chinese market. Not all of the market, but certainly large parts of it,” he said.
“We do have exposure to China through our Asian funds, for instance, but we don’t have specific Chinese exposure because there’s a lot of over-priced stocks in that market that we don’t want exposure to.”
There have been fears that China’s soaring stock market will soon undergo a correction, following the Shanghai Composite index falling 8 per cent in the last week.
The index’s phenomenal 145 per cent return over the last 12 months has led many investors to believe that the market is in a bubble and that these stellar returns aren’t sustainable.
However, both Marchant and Evan-Cook believe that there is no harm in holding equities in the region, so long as they are held as part of a diversified portfolio.
In Canada Life Investments’ Pacific Asia portfolio, there is also a 25.3 per cent weighting in South Korea, which Marchant believes is another potentially lucrative region in Asia.
“There are some other particular areas and certain markets within our Asia fund that we like – we’ve got exposure to Korean cosmetics companies,” he said.
“There is a lot of interest in Korean culture across Asia – it’s called the ‘K Wave’. Our Asian fund manager Kim Lee came back from Asia last time she went with photographs of mainland Chinese residents queuing up to buy Korean cosmetics.”
“China is the second-biggest cosmetics market in the world and is growing at around 10 per cent per annum. But they all want to look Korean and embrace Korean culture, it seems.”
“We’ve seen that along with Gangnam Style and Psy – he epitomises that growth and interest in Korean culture. In fact, there’s a story on the BBC website talking about the growth in number of Korean food stores in the UK, so maybe it’s coming this way too.”
According to data from FE Analytics, the three top-performing Asia Pacific ex Japan funds over five years are First State Asia Pacific, First State Asia Pacific Leaders and First State Asia Pacific Sustainability, all of which have returned more than 60 per cent.
Performance of funds vs sector and index over 5yrs
Source: FE Analytics
Evan-Cook says that Premier’s multi-asset funds generally hold high weightings in Asia because of this diverse range of stocks to choose from, as well as the good growth opportunities the region can offer.
“Valuations there are competitive, certainly a lot better than you get in the US equity market currently, there are plenty for good companies there with good growth prospects, certainly demographics are supportive in Asia, and there’s a fairly broad market so there’s a lot of good stocks for active managers,” he explained.
“Also, the markets aren’t as efficient as some other markets so you’ve got greater potential for alpha from those active managers too.”