Asia contains the majority of the world's population and is growing fast enough to produce an economy the size of Germany every four years. "But you wouldn't know it" from recent stockmarket performance, says Kopin Tan in Barron's. The MSCI Asia Pacific ex-Japan index has fallen by more than 20% from April's peak, taking it to a three-year low. Fears over a hard landing in China, falling commodity prices and the prospect of higher interest rates in America, which would draw money away from emerging markets, have been the main culprits. "Many countries rely heavily on sales to China," notes Craig Erlam of Oanda, so their growth will be undermined if China doesn't pick up soon.
Exports to China make up around 10% of GDP, on average, for its regional neighbours, although the figure ranges from the low-single digits for India, Indonesia and the Philippines to 25% for Hong Kong. Still, the good news is that worries over a hard landing in China are receding this may prove a good entry point for long-term investors.
China's clouds are lifting
Any improvement in China should boost Asia ex-Japan's exports. Interest rates across the region are near all-time lows. Subdued inflation means any further falls in Asian currencies should not prompt rapid rate rises to squeeze out inflation in import prices. All in all, Capital Economics expects GDP growth in emerging Asia to rise to 5.6% in 2016 from 4.3% this year. In 2004-2013, annual growth averaged 7.4%.
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This doesn't seem much to pay for the region's potential. A widely cited E&Y study from 2013 estimates that two-thirds of the world's rapidly growing middle class people with enough money to buy consumer goods will live in Asia.
In Indonesia, the number of people in the middle-income bracket is set to more than double in five years. All this means "huge pent-up demand for housing, consumer durables, transport and banking services", says Aberdeen Asset Management's Hugh Young on Trustnet.com. The region has also begun "to emerge quietly from China's giant shadow". The ten nation Association of Southeast Asian Nations, Asean, "has developed into something resembling a single market of some 625 million consumers", says Young. Youthful populations will swell the ranks of the region's labour force for years to come.
Two investment trusts are worth a look. Scottish Oriental Smaller Companies (LSE: SST) is the top-performing trust in the sector over the past decade, says Citywire. It has gained 275% in the past ten years. A less risky play, as it is not skewed towards small caps, is the Fidelity Asian Values (LSE: FAS) trust, up by 150% over the same time period. The two funds are on discounts of 11%-12% to their net asset values (ie, their share prices are below the value of their portfolios).
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Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
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