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Missed the China rally? Wider Asia says no you didn’t

29 March 2023

While portfolios have benefited from the China rebound, and could still do so, it is far from being the only game in town.

By Darius McDermott,

Chelsea Financial Services

China’s reopening story, and subsequent investor rally, has led chatter about Asia since the country’s “mother of all U-turns” at the start of 2023. But if you missed the New Year boat, don’t worry – not only may the rally not be over, but the positive impact on the wider region is far from done.

And don’t just take my word for it – the International Monetary Fund (IMF), in a recent blog, has said the economic headwinds that faced Asia and the Pacific last year have started to fade, from falling food and oil prices as well as China’s rebounding.

These developments are helping improve prospects across the region, with growth set to accelerate to 4.7% this year up from 3.8% in 2022. With those numbers, the IMF reckons, and it’s hard to argue otherwise, that “this will make Asia and the Pacific by far the most dynamic of the world’s major regions and a bright spot in a slowing global economy”.

Another positive point is valuations in Asia look relatively appealing, particularly compared to other regions such as the US and against historical averages, Richard Sennitt, manager of Schroder Oriental Income trust, points out.

Sennitt expects many regional markets to benefit from increased Chinese consumption and tourist arrivals. From an income perspective, the region offers an attractive dividend yield in a global equities’ context, he says, “while payout ratios are not extended, and corporate leverage is generally low compared to other regions”.

Trends that have benefited Asia for the past three decades – rising household incomes, deepening capital markets and a shift toward innovation-based economies – are ones to watch for the next decade, according to Sharat Shroff, manager of the Matthews Pacific Tiger fund, with “domestically oriented businesses that cater to local and regional consumers the main beneficiaries”.

Sharat is keen on secular growth opportunities in areas such as discretionary consumer spending, healthcare, renewable energy, and information technology, as these opportunities continue to deepen across the region.

China remains an important bellwether for the wider region, of course, and while the reopening news has been largely digested, Charlie Dutton, manager of the Ninety One Asia Pacific Franchise fund, believes we’ve yet to see the full upside impact of the final structure of the Politburo and clearer policy direction in China.

Dutton’s talking about an increased focus on business fundamentals and companies underpinned by structural growth in China and the broader Asia Pacific ex Japan region.

“This will largely focus on expanding domestic consumption demand and high-quality development, which includes investments in science, healthcare and technology and less of a focus on property and infrastructure,” he argues.

All of this is to say, while portfolios have benefited from the China rebound, and could still do so, that is far from being the only game in town so don’t worry if you were slow to get the gains – the rest of Asia and emerging markets have scope to benefit and surprise positively.


Funds to consider

Investors looking to capitalise on the opportunities in Asia and emerging markets could consider the Guinness Asian Equity Income fund or the Invesco Asian fund.

The former invests in companies across the whole Asia Pacific region, including Australia, and is concentrated at just 36 equally weighted stocks. It has a one-in, one-out policy, looking for a combination of capital and dividend growth.

The Invesco fund is value orientated and the manager looks for companies where the market is underestimating earnings growth. Stocks are chosen with a three-year investment horizon, to give the share price time to appreciate to a level he believes to be fair value.

For a wider play on emerging markets, the Aubrey Global Emerging Markets Opportunities fund is a great way of capturing the opportunities arising from the growing consumer base.

It invests in companies offering products and services to the upwardly mobile, ambitious and aspirational population centres which account for over 70% of the world’s growth. Preferred areas include the travel, education, healthcare and e-commerce sectors, and there is a focus on firms which either have dominant or first-mover advantage.

Darius McDermott, managing director, Chelsea Financial Services & FundCalibre. The views expressed above should not be taken as investment advice.

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