Is it time to embrace Asian equities?
It’s a region that accounts for close to half of global growth and some of the world's largest companies1. Yet, it’s also shunned by many Western investors. So, why do Asian equities often get overlooked?
Overcoming ‘home bias’
First, there’s the issue of ‘home bias’ to overcome. This is the tendency of investors to overweight their portfolios with investments in their home country or region.
This can be due to a number of factors, including familiarity, comfort, and a belief that their home country is more stable or prosperous.
Of course, there are some risks associated with investing in Asian equities. These include political instability, currency volatility and regulatory changes.
However, the more you know about international markets, the more comfortable you might be investing in them. Or rather, the more you understand the value of diversification, the less fearful you might be of looking beyond familiar domestic options.
Overcoming the powerful hold that home bias has on many investors can be a challenge, but it’s important to remember that diversification helps to improve your chances of long-term investment success.
Asian growth story?
Broadly speaking, Asian equities offer a vast range of potential opportunities for Western investors.
The region is home to some of the world’s fastest-growing companies, there are the diversification benefits as touched on above, and Asian stocks often trade at a relative discount to their Western peers2. This means that you could potentially get more value for your money by investing in Asian equities.
There’s also the growth story to consider. The economic transformation of Asia is nothing new, having taken place over the past few decades. But it’s maybe not the growth story it once was. For instance, China has been one of its main drivers – expanding at something approaching warp speed – but the region’s powerhouse now faces a number of post-pandemic challenges, including rising inequality, environmental degradation and an ageing population.
South Asia also has between 10%-18% of its gross domestic product (GDP) at risk to climate change, according to the World Economic Forum3, which is treble that of North America and 10 times more than Europe, the least affected region.
Yet, for all its more recent challenges of dealing with the COVID-19 pandemic, rising interest rates, changing demographics and the impacts of climate change, Asia-Pacific’s GDP still grew at a reasonable lick of 4% in 20224, compared to just 3.2% for the global economy5. Key Asian drivers include strong domestic demand, rising incomes and increased investment.
So, while it’s unlikely that some of the countries making up Asia’s economy will grow quite as quickly as they once did (as an example, China’s GDP advanced at an average annual rate of 10.2% from 1978 to 20226), the region is still expected to thrive in the coming years – albeit at a slower pace. Investors looking at the region may need to factor this into their Asian strategies, but it can still be a fertile hunting ground for those prepared to do their research.
Local knowledge is key
Asia is a diverse region with a wide range of economies, cultures and regulations. Without local knowledge, it can be difficult to make informed investment decisions.
For instance, the MSCI Asia Pacific Index covers 11 countries, including China, Japan, India, and South Korea.
If you’re considering investing in Asia, it’s important not to downplay the value of local knowledge – to understand the risks and opportunities in each market, navigate the local regulatory environment, and access local information and resources.
But you shouldn’t just be investing in Asia purely to gain exposure to the market. There are a number of factors to consider before investing in any market, including the risk profile of the market, investment objectives and time horizons. And if you’re looking for short-term gains, Asia may not be the market for you.
Instead, one strategy could be to target Asian stocks that boost long-term returns – in other words focusing on the ‘alpha’ rather than the ‘beta’.
Alpha stocks are stocks that have historically outperformed the market (and tend to possess strong fundamentals), whereas beta stocks move more in line with the market. However, while alpha stocks have the potential to generate higher returns, they are also more volatile – so you should be prepared for the possibility of losses.
Ultimately, though, the decision to invest in Asian equities is a personal one – and you should always carefully consider your individual circumstances and investment goals before making any investment decisions.
If there is one key piece of insight to take away from this article, it’s that global diversification – across not only countries, but also industry sectors and types of assets – can play an important role in long-term investing. Ignoring its merits can leave a portfolio coming up short in both defence and attack.