Do you have enough exposure to fast-growing Asia?
Remember when everybody was saying this was the Asian century, and investors had to adjust their portfolios to match the new reality?
Investors duly took note and piled in, lured by China’s breakneck growth, but many drifted away as the financial crisis, US tech giants and Covid-19 gave them something else to think about.
People forgot about the Asian century thing, but that could be a mistake. Asia's rise to economic power and prominence has hit one or two bumps in the road, but it remains on course to fulfil its destiny.
The region is emerging from the pandemic in relatively good shape, yet it trails the US stock market.
Now could be a good time to examine your portfolio, to see how much exposure you have.
A century of progress
Asia is a big deal. The continent is home to 60% of the world’s population, who are youthful, educated and entrepreneurial. They are increasingly urban and middle class, with incomes to match.
If Asia maintains its momentum, GDP will grow from $17 trillion in 2010 to $174 trillion by 2050. That is half of global GDP, up from a quarter today, and would raise living standards to European levels, according to Asia 2050: Realising the Asian Century.
This would be a case of back to the future, as Asia will recover the dominant economic position it held 300 years ago, before the industrial revolution.
Powerhouses such as China, Taiwan, Singapore, South Korea, Thailand and Malaysia aren’t just exporting to the West. Rapid integration means that 60% of goods traded are within the region, and China’s trillion-dollar Belt & Road infrastructure project will accelerate that. The region is host to global giants including Taiwan Semiconductor, Tencent Holdings, Alibaba Group, Baidu and Samsung Electronics, and is pioneering emerging tech themes such as 5G, the internet of things, automation and AI.
It's a massive opportunity.
The post-Covid revival has begun
Although the pandemic started in China, the West has been hit much harder. Just 13 have died in Taiwan, while death tolls in Singapore (32) and Vietnam (39) are also negligible. The official Chinese death toll of 4,636 is hard to believe, but the true figure is unlikely to be as high as the US, where more than 600,000 have died so far.
Overall, developing economies in east and southeast Asia shrunk by just 0.2% in 2020, according to the ADB Asian Development Outlook index, which predicts growth of 7.3% this year.
By comparison, the US ended 2020 down 3.5%. S&P Global Ratings predicts 6.5% growth this year. That's good, but not as good as Asia.
Despite this, Asian region stock markets have underperformed the US. Over the last year, the MSCI USA Index grew by a thumping 48.47%, outstripping MSCI Asia’s 41.29% and MSCI China’s 37.15%.
Asia still faces challenges
Success is not inevitable. It never is. Rising inequality could undermine social cohesion and stability, as it has in the West.
There will be intense competition for finite natural resources, while climate change could threaten agricultural production, coastal populations, and some major urban areas.
Political uncertainty, poor corporate governance, fragile institutions and rising corruption are also a threat. Chinese President Xi Jinping’s military aggression could end badly.
Then there is the danger of getting caught in the “middle income trap”, where economic growth stagnates before countries transform themselves into high-skilled, high-wage, innovative economies.
Many have fallen at that hurdle before.
China may be course to overtake the US as the world's second biggest economy, but US output per person remains six times higher.
Demographics are another threat, as the population ages at an unprecedented rate. By 2050, one in four in the Asia-Pacific region will be 60 years old, more than double today's number. As in the West, this will shrink the pool of workers, while increasing the number of older people who need looking after.
Investing is never free of risk. The developed West arguably faces greater challenges, and its growth prospects are smaller.
The cheapest and easiest way to invest in Asia
Buying individual stocks can be tricky, for example, in South Korea, five family-controlled conglomerates account for roughly half the country's stock market, while many Chinese companies are state owned.
Most investors should spread their exposure with a balanced portfolio of mutual funds and low-cost exchange traded funds (ETFs).
Investors can tap into the region’s growth through a broad, diversified fund such as the Vanguard FTSE Emerging Markets ETF, iShares MSCI All Country Asia ex-Japan ETF, SPDR S&P Emerging Asia Pacific ETF or SPDR S&P Pan Asia Dividend Aristocrats ETF.
Alternatively, many ETFs offer exposure to individual countries, such as VanEck Vectors China Growth Leaders ETF or VanEck Vectors Vietnam ETF, or the iShares range of country funds such as MSCI South Korea and MSCI Taiwan.
Faster GDP growth does not directly translate into higher stock market returns. Investors should still have greater weighting to developed markets, where the return on capital is much higher.
You might want to up yours, though.
Head to Asia for income
Asia is also growing in popularity among investors seeking fixed income from government and corporate bonds.
High-yield bonds often perform well in a recovery and Asian yields average around 6.2%, compared to 4.4% for US high yield.
The iShares Barclays USD Asia High Yield Bond Index ETF pays income 5.87% a year, while iShares J.P. Morgan EM High Yield Bond ETF yields 5.51%.
For those wanting less volatile investment grade bonds, the iShares J.P. Morgan USD Emerging Markets Bond ETF yields 3.87%, Vanguard Emerging Markets Government Bond Index ETF yields 4.13%, while the SPDR Barclays Capital Emerging Markets Local Bond ETF yields 3.46%.
The Asian century still has a long way to run. Don’t let it pass you by.
Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.
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