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Abu Dhabi, UAESunday 23 September 2018

China's market pedigree spurs Asia-Pacific opportunity

Many experts say that recent falls could be a buying opportunity for the booming Asia-Pacific region. Should you set a course for the Pacific rim?

Revellers perform during celebrations for the Chinese New Year parade, marking the year of the Dog. Patricia De Melo Moreira/AFP
Revellers perform during celebrations for the Chinese New Year parade, marking the year of the Dog. Patricia De Melo Moreira/AFP

China celebrated its New Year on Friday to herald the Year of the Dog with the country's stock market once again showing its pedigree.

After five years in the doldrums China has been one of the world's best-performing economies over the past 12 months.

Its recovery has helped to drive growth across the region, with the Asia-Pacific investment sector rising an impressive 32.04 per cent last year, according to MSCI.

This put it comfortably ahead of the next best performer, Europe, which grew 26.24 per cent, and also the US at 21.19 per cent and the UK at 11.71 per cent in what was a bumper year overall.

Stock markets have been volatile so far in 2018 but many experts say that recent falls could be a buying opportunity for the booming Asia-Pacific region. Should you set a course for the Pacific rim?

Go East: Definitions vary, but generally speakingAsia-Pacific centres around the Western Pacific Ocean, to include much of East Asia, South Asia, South East Asia, and Oceania (Melanesia, Micronesia, Polynesia and Australasia).

MSCI divided the region into five developed economies: Australia; Hong Kong; Japan; New Zealand; and Singapore, and nine emerging ones: China; India; Indonesia; South Korea; Malaysia; Pakistan; the Philippines; Taiwan; and Thailand.

Vijay Valecha, chief market analyst at Century Financial Brokers in Dubai, says other countries are sometimes included, such as Vietnam and even Canada. “Whichever way you look it, Asia-Pacific boomed last year, with China’s stock market rising 52.5 per cent, Hong Kong up 30.56 per cent and India up 30.49 per cent."

He says their economies are supported by “brilliant” financial regulators. “The Monetary Authority of Singapore, Reserve Bank of India, Bank Negara Malaysia, Bank Indonesia and others have driven growth and development at a large scale. From fintech to retail to logistics, almost every sector has seen a boost, driving overall economic growth.”

This year opened with a market correction as a wave of nerves swept across every global stock market, not just Asia-Pacific.

Investors fear inflation is set to make a comeback, which will force central banks to hike interest rates to keep a lid on prices, and bring the era of cheap money to a close.

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However, Mr Valecha says that is actually a positive sign, as inflation is rising due to stronger economic growth, falling unemployment and increasing wages. "The trigger for the correction was a strong US labour, report which showed jobless claims falling to a 45-year low, creating fears that US Fed will be hiking rates at a faster pace, while European economic growth has been revised upwards to 2.3 per cent for 2018.”

He says recent market volatility will continue but a full-blown crash requires a global recession. “All recent economic data suggests the opposite, that global growth will remain strong this year and next, boosting Asia-Pacific and emerging markets generally.”

So is now the right time to tilt your portfolio to Asia-Pacific? Market performance is highly cyclical and buying last year's top performer is always a dangerous temptation but Mr Valecha is undaunted, saying that Asia-Pacific has momentum on its side. “Growing investor and business confidence looks set to trigger a sustainable circle, as higher investment inflows release pent-up domestic demand and trigger domestic growth, which should further boost confidence. This loop is already in action.”

His current preferred destination is Hong Kong’s Hang Seng Index, which offers exposure to both local and mainland Chinese shares.

It is currently trading at an undemanding valuation of 11.51 times earnings, below the 15 figure that is typically thought to reflect fair value and the expensive forward valuation of 23 on the US S&P 500, suggesting opportunities remain. “Better still, earnings per share on the Hang Seng are forecast to grow almost 20 per cent over the next year,” Mr Valecha adds.

He says the best way for most ordinary people to invest in the market is via a low-cost exchange traded fund (ETF).

You can choose from ETFs that track Asia-Pacific and emerging markets generally, or individual countries, sectors and asset classes.

His preferred ETFs include Vanguard FTSE Pacific (VPL), which focuses on developed countries with more than half of the fund invested in Japan, and smaller weightings in Australia, South Korea, Hong Kong and Singapore.

The fund is up 20.66 per cent over the past year, according to Bloomberg, although a sign of the sector's prior volatility is that it has returned just 8.24 per cent over five years.

Mr Valecha also recommends iShares Core MSCI Pacific (IPAC), which again has hefty Japan exposure at 68 per cent of the fund, alongside Australia, Hong Kong and Singapore. It has returned 19.4 per cent over one year, although just 9.49 per cent over three years.

Charges on these two funds are a rock bottom 0.1 per cent, which reduces the drag on performance.

For those happy to take on more risk in the hope of generating a higher return, he tips SPDR S&P Emerging Asia Pacific (GMF), which has greater exposure to emerging Asian countries such as China and India, rather than Japan, and returned a juicy 33.27 per cent in the past 12 months. Fund charges are slightly higher at 0.49 per cent a year.

Gordon Robertson, director of the Me Group of businesses in Dubai, says although investors may be nervous about investing money in Asia-Pacific amid current volatility, this looks more like a short-term correction than a full-blown crash.

Nobody can predict where markets will go next but as Asia-Pacific valuations are far lower than the US, the region looks tempting today, he says. “Asia-Pacific is trading at a forward valuation of 14 times earnings, which is inexpensive, and I would be trying to add or establish positions during this correction. Rather than investing all your money at once you could pay in smaller sums over, say, a three-month period, to spread your risk slightly.”

Mr Robertson says Japan has improving fundamentals and should deliver stable growth as long as the world economy grows. “Domestic consumption is improving but exports are what really matters. A strong Japan will have a positive impact on the overall returns in Asia Pacific.”

He recommends that private investors buy and hold low-cost ETFs for the long term and echoes Mr Valecha in tipping Vanguard FTSE Pacific for those who want exposure to Japan, and SPDR S&P Emerging Asia Pacific ETFs targeting emerging countries such as China and India.

Your decision depends on personal factors such as where your portfolio is already invested, which markets you expect to perform best and your attitude to risk.

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Tom Anderson, senior investment manager at wealth advisors Killik & Co, who has clients in Dubai, says despite the recent fuss over a supposed meltdown, global markets have only fallen around 7.5 per cent, which follows almost nine years of bull market, so no need to panic. "It feels uncomfortable after a decade of relentlessly positive markets, but is unremarkable in historical terms.”

Mr Anderson says this is, nonetheless, an opportunity to buy into stock markets at a reduced price, although you must also brace yourself for further volatility. "You should invest in Asia-Pacific as part of a balanced portfolio, focusing on quality economies."

He tips Stewart Asia Pacific Leaders, an actively managed mutual fund which leans towards India, Taiwan, Hong Kong and Singapore.

It is relatively defensive, growing just 5 per cent over the past year, but it has delivered a total return of 54 per cent over five years, , according to figures from Trustnet.com. This is an impressive performance in turbulent times. It could, therefore, offer diversity and balance to the ETFs mentioned in this article.

China: Year of the Dog: All eyes are on China as the country reminds us that it is still the region's top player, although it cannot escape recent market uncertainty.

Mark Taylor, chief customer officer at stockbroker Selftrade, owned by Equiniti, says a sell-off was always likely after last year's storming performance. “We saw significant sell-offs of the db x-trackers MSCI China Index ETF throughout January, so it seems investors anticipated this wobble.”

Mr Taylor says China faces several major challenges. “It has a significant annual budget deficit and its borrowings are rising. There is a considerable amount of debt in the government and private sector, and bad loans could lead to a volatile 2018.”

However, he says it is also a huge long-term opportunity, as the country’s burgeoning emerging middle-class consumer base flexes its financial muscles and spending power, and he tips the Vanguard FTSE Emerging Markets ETF (VFEM), which is one third invested in China, alongside other emerging markets including Taiwan, Brazil, India, South Africa, Thailand and Russia.

Jason Hollands, managing director at wealth advisers Tilney Investment Management Services, says China is difficult to resist for long-term investors who can withstand short-term volatility, but warns of demographics problems. “The country is set to face a shortage of younger workers despite scrapping its controversial one child policy in 2016.”

Another problem is that many listed companies are controlled by the Chinese government and corporate governance is not up to developed-world standards, Mr Hollands adds. “Most investors should diversify their risk by purchasing a broader global emerging markets fund, rather than one that invests purely in China.”

Mr Hollands tips Asian Alpha Plus, which has 30 per cent in Chinese companies and 20 per cent in Hong Kong, plus exposure to other countries such as South Korea, India and Taiwan.”

The fund is up 22 per cent over the past year, and 72 per over five years, according to figures from Trustnet.

Mr Hollands also tips Fidelity Emerging Markets, which is around 23 per cent invested in China and 9 per cent in Hong Kong, plus South Africa, India, Russia and others. It is up 20 per cent over one year and 65 per cent over five years.

Ed Smith, head of asset allocation research, Rathbones, says despite debt concerns China should remain the largest Asian growth engine for the next 20 years, continuing to outstrip rivals such as India.

Mr Smith says China should benefit from continuing strong growth in the world economy, as President Xi Jinping presses ahead on economic reforms. “Global economic and financial conditions will ensure China and emerging market equities have another good year.”

Every dog has its day, they say, and China is no exception.

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