Global markets have been dominated by the outperformance of US stocks for the past decade, but Darius McDermott, managing director of FundCalibre, thinks that it could be Asia’s turn to lead markets in the next 10 years. 
US market leadership over the past decade has been helped by the post-financial crisis low rate environment and loose monetary policy and low growth environment, which has fuelled demand for the higher returns from growthier, technology-oriented companies that dominate the market.
However, McDermott (pictured) said this could be about to change, highlighting are four key reasons why markets could flip and Asia “turn out to be the investment of the decade”.
Firstly, McDermott said financial crises – such as that sparked by the Covid-19 pandemic – can sometimes lead to secular shifts in market performance, with analysis carried out by JP Morgan Asset Management claiming the next 10 years could be ‘Asia’s Decade’.
“After the global financial crisis, the pendulum swung back in favour of the US and growth stocks,” he said. “There could be a similar shift today, as north Asia leads the world out of the pandemic.”
Secondly, increased urbanisation and the ongoing growth of the Asian middle class over the next decade – particularly in China, India, and Indonesia – should fuel growth in the region.
A third driver for regional growth should be a pick-up in inter-regional trade following the creation last year of the Regional Comprehensive Economic Partnership (RCEP), the world’s largest trading bloc.
Made up of 15 countries – the 10 Association of Southeast Asian Nations (ASEAN) countries, and which includes China, Japan, Korea, Australia and New Zealand – the bloc represents one-third of global GDP.
McDermott said the launch of the bloc means that inter-regional tariffs will be reduced, supporting long-term growth of the region.
Finally, McDermott said attractive valuations make it a good time to invest in the Asian growth story.
“Aggregate valuations are now above long-term averages and increasingly starting to price in a recovery,” McDermott said. “However, the wide divergence of valuations and prospect for the broadening of the earnings recovery means that, although, there are some areas of the market starting to look ‘frothy’, such as in selective electric vehicles, biotech and tech names, other areas of the market have lagged and are trading at relatively attractive valuations.”
So, how can investors play this theme? Below, McDermott gives his four Asian fund picks.
Invesco Asian
The first fund is £1.7bn Invesco Asian, run by William Lam, which McDermott described as a “concentrated, value-orientated fund” focusing on unloved areas of the market where undervalued companies can be found.
“Lam looks for companies where the market is underestimating earnings growth and 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,” said McDermott.
Given the its value bias economically sensitive companies are well represented, according to Lam. However, the fund also has significant exposure to technology and Chinese internet companies with strong fundamentals and attractive growth prospects.
Performance of fund vs sector over 3yrs
Source: FE Analytics
Over the past three years, Invesco Asian has made a total return of 25.47 per cent, underperforming against the IA Asia Pacific Excluding Japan sector (29.39 per cent). It has an ongoing charges figure (OCF) of 0.95 per cent.
JPM Asia Growth
McDermott’s next pick is the £2bn, five FE fundinfo Crown-rated JPM Asia Growth fund, another concentrated, high-conviction fund overseen by Joanna Kwok and Mark Davids.
“Hong Kong-based managers Kwok and Davids will invest in the shares of up to 60 companies of any size, primarily focusing on quality, growing businesses to generate superior capital gains than their peers and the wider market,” said McDermott.
Over three years JPM Asia Growth has made top quartile returns and is the sixth best-performing fund out of 101 in the IA Asia Pacific Excluding Japan sector, having made a total return of 56.75 per cent. It has also beaten the MSCI AC Asia ex Japan index over that time, which returned 26.84 per cent.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
JPM Asia Growth has an OCF of OCF 0.89 per cent.
Ninety One Asia Pacific Franchise
The third fund recommended by McDermott is the £340.5m Ninety One Asia Pacific Franchise, managed by Charlie Dutton and investing in a concentrated portfolio of high-quality businesses operating within or associated with strong brands and franchises.
“The fund’s emphasis is on finding exceptional businesses through detailed fundamental research,” said McDermott. “It typically ignores more cyclical and lower quality parts of the market such as energy, materials, telecoms and utilities.”
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Over three year, Ninety One Asia Pacific Franchise has made a total return of 41.92 per cent. Holding an FE fundinfo Crown Rating of five it has an OCF of 0.87 per cent.
Stewart Investors Asia Pacific Leaders Sustainability
McDermott’s final pick is the £7.3bn Stewart Investors Asia Pacific Leaders Sustainability fund overseen by FE fundinfo Alpha Manager David Gait and colleague Sashi Reddy.
Investing in large- and mid-cap companies, the managers judge potential investments on three key ‘quality’ points: firstly, the quality of the management; second, the quality of the company in regards to its environmental impact, efficiency and responsible business practices; and, thirdly, the quality of the company’s finances and financial performance.
When it comes to sustainability the management think that companies which deliver social and environmental benefits face fewer risks and have more long-term opportunities, meaning that these more sustainable companies can provide better shareholder returns.
“Specific consideration is given to companies that are positioned to benefit from, and contribute to, the sustainable development of the countries in which they operate,” added McDermott.
Performance of fund vs benchmark over 3yrs
Source: FE Analytics
Over three years, the four Crown-rated Stewart Investors Asia Pacific Leaders Sustainability fund has made a total return of 38.13 per cent outperforming the MSCI AC Asia Pacific ex Japan (26.33 per cent). It has an OCF of 0.84 per cent.