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Fund Investors Look to Asia for Bargains

With an end to the trade spat between the US and China seemingly coming to an end, investors are beginning to buy back into cheap Asian markets

David Brenchley 20 March, 2019 | 3:28PM

Shanghai, China

Funds focused on Asia saw their best month for inflows since December 2017, Morningstar Direct data show, as worries over trade continue to dissipate and valuations improve.

Net inflows for funds in the Investment Association Asia Pacific ex Japan sector hit £306 million in February after two months of outflows.

The news follows last month’s influx of cash into emerging market funds, as investors switch back into risky assets.

Asian markets had a tough 2018. The MSCI AC Asia Pacific Ex Japan Index lost almost 14% of its value through the course of the year – just 65 basis points less than the MSCI Emerging Markets index and not far off twice that of the MSCI World.

Much of the pain was attributable to the Chinese market, with the MSCI Pacific ex Japan, which excludes mainland China stocks, losing 10.3%.

But, in a similar vein to many other markets globally, 2019 has seen a rebound. Both aforementioned indices are up almost 12% year-to-date, just outperforming MSCI EM.

And investors have begun to dip their toes back in the water. The main beneficiary of this was the Morningstar Bronze-rated iShares Pacific ex Japan Equity Index fund, which tracks the FTSE World Asia-Pacific ex-Japan Index. The offering saw inflows of £161 million.

The fund has 30% of its assets invested in Australia, 20% in South Korea and 17% in Hong Kong. Top positions include Samsung Electronics, Taiwan Semiconductor, AIA and Commonwealth Bank of Australia.

Following behind that fund were Bronze-rated Invesco Asian and Newton Asian Income with £46 million and £42 million respectively. While the iShares tracker does not include Chinese stocks, the two active funds do.

Attractive Opportunities

More positive news flow over trade talks between the US and China is one catalyst for investors to begin to look at Asia again, with many hoping for a deal to be struck soon. Further positives include a weaker US dollar and the US Federal Reserve’s dovish turn on monetary policy which is likely to see its rate hiking cycle either pause or come to an end.

Asian fund managers are still constructive on the region, despite the volatility they have experienced over the past few years. Robert Horrocks, chief investment officer at Matthews Asia, thinks there are better days ahead.

He notes that Asian policymakers believe the recent outperformance of Western – US, in particular – markets and failure of Asian equities has been in part due to poor corporate governance.

As a result, we’ve seen strides in some companies – Japan and South Korea in the main – to improve this. “In China, policymakers have taken up the mantra of ‘quality of growth’,” he adds. “Companies appear to have responded by improving their internal incentive schemes and better communicating with shareholders.”

Eric Moffett, portfolio manager of the T. Rowe Price Asian Opportunities Equities fund, too says he remains optimistic for Asian equities, with a bias towards China A-Shares. They should be boosted by their recent inclusion in the MSCI Emerging Markets Index, which Moffett believes will improve companies’ transparency and governance.

A-Shares are currently trading at depressed levels, Moffett says, so are offering some compelling investment opportunities. “Company valuations have been hurt by negative sentiment from the US-China trade dispute and slowing growth in China,” he notes. “However, household incomes continue to grow along with the increase in minimum wages.”

Horrocks agrees, noting it seems an appropriate time for investors to consider their allocations to Asia and look through the short-term gyrations in the markets. “At least with a portion of their investments, [investors should] allocate to strategies that seek not necessarily to maximise the gains from short-term speculation but to offer better long-term returns for true savers.”

Another finding opportunities in Asia is Dhananjay Phadnis, manager of the Fidelity Emerging Asia fund. Phadnis says he looks to identify high-quality companies with sustainable growth prospects trading at attractive valuations.

“A favourable valuation backdrop – combined with strong structural growth prospects underpinned by drivers such as rising consumption, urbanisation and innovation – is providing an array of opportunity,” he explains.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BNY Mellon Asian Income Instl W Acc1.77 GBP-0.52
Fidelity Emerging Asia W Acc157.50 GBP-0.25
Invesco Asian UK Z Acc415.73 GBP-0.43
iShares Pacific ex Jpn Eq Idx (UK) D Acc328.41 GBP-0.48
T. Rowe Price Asian Opps Eq Q GBP20.29 GBP-0.63

About Author

David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk

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