Asia is currently offering more stable and higher organic growth compared to any other emerging region, according to Yoshiki Takeda, senior portfolio manager at SuMi Trust Asset Management.
Buoyed by this growth, “Asian equities have been providing excellent returns in the mid-to-longer term,” he said.
The fund manager believes investors in the UK and all around the world are currently facing two major challenges: how to enhance returns and diversify portfolios to reduce risk.
“Asian equities are able to provide the solution to both of these challenges,” he explained. “They can be a strong return driver and can also contribute to portfolio diversification.”
It’s an area where UK investors are increasingly taking greater exposure with net retail sales of £585m into the IA Asia Excluding Japan sector over the past year, despite concerns over trade war escalation.
Source: Investment Association
Matthews Asia fund manager Sunil Asnani agrees, adding that Asia’s consumption-driven growth means the region is now home to some of the world’s most dynamic companies.
“Asia’s economic growth continues to outpace the rest of the world, both in absolute and per capita terms, to the extent that the region now accounts for over one third of global GDP,” he said.
“Asia is a region where you can find many self-sustaining businesses which are less impacted by global shocks,” Asnani said. “The region is also a hotbed of entrepreneurship.”
As such, SumiTrust’s Takeda – who has been running the firm’s Asian equity strategy since 2010 – has identified three key themes within his own portfolios that should drive returns over the longer term.
Takeda’s three themes are increased infrastructure investment in India— and in China – the growth of fintech and drug distribution.
India, the manager said, has become one of the most attractive destinations for investments and is on the path to becoming a manufacturing hub, but has been hindered by a lack of infrastructure investment. 
Indeed, the Indian government estimates that $780bn of investment in infrastructure is required by 2022, according to the SuMi Trust manager.
However, this situation could be about to change and could lead to investment opportunities, according to Takeda (pictured).
“India’s capacity utilisation is at a five-year high,” he said. “That leads companies to make new investments.”
Takeda also expects the Indian government to promote manufacturing in the country after adopting ‘Made in India’ as a national slogan.
On China, Takeda acknowledged that while economic growth has slowed down it “is supported by the transformation of the country’s economic structure from a manufacturing-driven to a service-oriented economy, which is under the government’s control”.
One beneficiary of the shift to a service-oriented economy is the fintech sector, which has benefited from the growth of financial services, as the middle class has expanded.
For example, insurance companies have been spending much more on fintech as wealthier consumers increase take-up of coverage.
The healthcare sector is another beneficiary of China’s growing middle class with more people willing to pay for healthcare services and high-quality drugs than ever before, according to the SuMi Trust manager.
Drug distributors are well-positioned to capture the growing market and benefit from industry consolidation following the implementation of China’s two-invoice policy in 2017, he added.
The two-invoice policy was designed to streamline China’s complicated and costly multi-tiered system. The new rules permit a maximum of two invoices between manufacturers and hospitals – each manufacturer will sell to a distributor, and that distributor will sell directly to hospitals.
The move is expected to bring greater opportunities for the integration of the medical device industry and Takeda said the policy will simplify and increase the transparency of the distribution landscape, with positive implications for investment.
Yet, for potential investors in China and the rest of Asia, a possible escalation of a US-China trade war remains a big concern, Takeda said.
The impact of an all-out trade war would be huge, said the SuMi Trust manager, this is because “the supply chain is globalised, and countries are closely interconnected”.
However, if things were to escalate, he argued, other Asian countries could substitute for China as alternative product providers to the US, which could produce some “some positive effects”. Nevertheless, it would be “difficult to wholly offset the negative effects” of such a confrontation, he added.
Takeda distinguishes between the two aspects of this conflict – the tech war and the trade war – noting that “the battle to dominate the tech industry could be never-ending”.
Yet, Takeda said the two economic superpowers “have reasons to compromise to redress the trade imbalance”, expecting cooler heads to prevail and reach an agreement soon.
It will be key if China wishes to hit the goal of doubling its 2010 GDP, an increase of $13trn, by 2020 to coincide with the 100-year anniversary of the Communist party, said Takeda. Meanwhile, US president Donald Trump is likely to want a renegotiated trade deal in time for his re-election campaign.
As such, the SuMi Trust manager remains bullish about the region, although he is vigilant of “companies with bad corporate governance, as those tend to provide poor returns”.
“From a sector allocation perspective, we have currently no positions in real estate and utilities, as they do not offer any mid- or long-term investment opportunities at the moment,” he added.