10 Reasons to invest in Asia

Recent market returns have alerted global investors to the opportunities that exist in the Asian markets - here are 10 reasons to continue to look towards the Far East.

Since the market bottomed in October 2008, the MSCI AC Asia ex-Japan Index has bounced.

  1. The strategic long term investment case remains intact. The Asia story is one that is fundamentally driven by strong demographics, rising wages, low debt and high savings - making it prime for strong GDP growth over the next years.
  2. Asian economies will now focus their effort more on domestic growth through investment and consumption, while Western consumers rebuild their savings. If we do see a pick up in OECD growth Asian exporters will be key beneficiaries of this.
  3. Rapidly growing Asian economies, particularly China, have much scope to boost private consumption. There is significant long-term potential for the expansion of domestic demand. With high savings rates, rising wages and the growth in personal credit, the propensity for consumers to spend is increasing and this can be seen throughout a wide number of consumer plays.
  4. Asia-ex Japan has relatively low levels of debt; particularly consumer debt. This debt burden means the West likely faces an extended period of structurally lower growth due to private sector deleveraging.
  5. Asian companies have stronger balance sheets. Gearing for Asia ex-Japan has fallen from 60% during the Asian crisis to 30% currently. (Source: J.P. Morgan Asset Management at Sept 09).
  6. Asian governments have an abundance of foreign exchange reserves, have had relatively balanced fiscal positions and are able to employ sustainable fiscal packages as counter cyclical tools. They could initiate a second or third round of stimulus if necessary. However, Western economies are running fiscal deficits, which will limit the flexibility of their fiscal stimulus packages.
  7. Asian Infrastructure continues to be one of the most exciting stories within the region. Despite the collapse in exports and private investment Asian governments have responded with stimulus packages worth over USD 800 billion. A significant proportion of this has been directed to infrastructure projects. The long-term infrastructure needs remain across Asia for a wide range of projects, such as railways, roads and power stations.
  8. Political risk in Asia is declining. Over the last 10 years we have seen a significant improvement in the politics of many Asian nations. Recent elections in Indonesia and India have yielded the most satisfactory outcome for investors as the resulting stronger mandates allow incumbent leaders Susilo Bambang Yudhoyono (Indonesia) and Manmohan Singh (India) to deepen the political and economic reforms in their respective countries. Political cooperation between countries in Asia is also improving - the best example of this being the recent upturn in relations between China and Taiwan.
  9. Intra-Asian trade for final products will grow. In the past 10 years, intra-Asian trade has been dominated by trade in components and materials that get assembled and then exported outside Asia. Over the next 10 years, intra-Asian trade in final products and domestic demand will drive the Asian emerging economies far more than in the past.
  10. Rising global weightings will push funds into Asia. Asia ex-Japan weightings in the MSCI AC World index have risen to an all-time high, having quickly recovered in the last six months. Higher weightings are likely to lead to global funds having to raise their exposure to Asia, either now or later.

And a couple of risks…

  • Central banks in Asia may raise interest rates earlier-than-expected. In fact, the acceleration in credit liquidity has been causing increasing concerns over bank asset quality, plus the potential for credit-asset bubble and inflation. That said, we don’t expect Asian policymakers to reverse their monetary policy stances through the remainder of this year.
  • A dramatic rally in commodity prices in the short-to-medium term will not be helpful for Asia (Asia is generally a net importer of raw materials).

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As the fund invests in equities, investors are exposed to stock market fluctuations and the financial performance of the companies held in the fund portfolio. Therefore, investors may see the value of their investment fall as well as rise on a daily basis, and they may get back less than they originally invested.