Most Asian economies are considered emerging markets, and those are the ones we are considering here.
As a developed market, Japan is considered separately, while South Korea is a special case, considered an emerging market by some and a developed market by others [see emerging markets guide here].
In terms of size, the Asian economy is dominated by China, currently the world’s second-largest economy.
In considering the composition of a fund, probably one of the most important things to take in to account is its weighting to China.
Does it invest in the country at all? (Some more specific funds don’t.) If it does, does it invest more in the index than its benchmark index? Does it invest through Hong Kong? Many funds prefer to get some or all of their exposure to China through countries based in Hong Kong where the legal system and corporate governance is more trustworthy, thanks to the British heritage.
Asia can also include Australia and New Zealand, and these countries are often invested in by income funds, as companies there have a more settled tradition of paying dividends.
As developed countries, they have a different risk profile from emerging Asia, although the health of the mining industry that is so important to Australia is strongly linked to China, where a large part of global demand for commodities comes from. Why invest in Asia?
Many, if not most, analysts think that emerging Asia will see the largest amount of economic growth over the coming years. Although economic growth does not always translate into stock market growth, this is also predicted by many.
Many countries in the region have healthy demographics that are supportive of economic growth, although not China any more. A lot of south-east Asian countries in particular do well in this regard, and these countries are also likely to see fast growth as they catch up with China and in some cases take over from it the industry that was looking for cheap labour there.
The internet economy and consumer industries have also yet to achieve the development in emerging Asia that they have in the West, even in the more developed parts such as China, which is another factor supportive of growth in the coming years. What are the risks?
Corporate governance is poor in many parts of Asia and even some experienced operators have been caught out in this regard. This is one reason to choose a fund that invests in China through Hong Kong, although there are issues outside China that mean the risk cannot be removed entirely. Picking a fund with a management team that places importance on meeting company directors and building a relationship with them is a good idea.
Returns on the Chinese market have been particularly poor in recent years, while economic growth has been strong. There is no guarantee this won’t continue, which makes picking the right fund even more important.
Finally, it is worth considering that received wisdom is regularly proven wrong. Just because everyone thinks Asia will pull away in growth terms over the next few years, this doesn’t mean that it will. Few people predicted the 2007 financial crisis, the dotcom boom or the Asian crisis of the late 1990s. For this reason, diversification is key.