Asian markets (excluding Japan) are still widely classed as “emerging markets”, but the description is misleading. China, South Korea and Taiwan now account for more than 75% of the MSCI Asia ex Japan index and more than 60% of the MSCI Emerging Markets. South Korea and Taiwan are high-tech economies by any standards. China is a more mixed picture, but highly advanced in many areas.
This means that Asia is a hard region to ignore. Four of the world's 30 largest firms are based there: Taiwan Semiconductor Manufacturing (TSMC); Korea's Samsung Electronics and SK Hynix; and China's Tencent. Crucially, these “fantastic four” are not just big companies, but also very well-placed. “The AI build-out is positive for Asia, with 38% of data-centre capital expenditure going to Asian businesses,” says Emily Whiting of JP Morgan.
In particular, TSMC is “one of the best businesses in the entire world”. While Nvidia and others design cutting-edge chips, it is TSMC that makes them. The market is growing strongly and chips are becoming almost a consumable, replaced every few years. That makes TSMC's forward price/earnings ratio in the high teens look almost like a bargain.
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Meanwhile Samsung and SK Hynix dominate the market for memory chips, with Samsung trading on a single-digit forward multiple. SK Hynix's specialism in ultrafast, high-bandwidth memory commands a higher rating, but still only in the mid-teens.
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Tencent is very different: it is mostly a domestic business, focused on entertainment, social media, the internet and gaming in China – ie, a consumption play. “Asia has 60% of the world's population and 48% of its GDP yet only accounts for 9% of the global stockmarket valuation,” says Whiting. “Demographic trends are strong, with over one billion people moving into the consumer class, to the benefit of the banking, financial and consumer sectors.”
Wider opportunities in Asian markets
This ensures that while nearly all the Asian specialist trusts have an exposure of more than 30% to the “fantastic four”, managers can find plenty to buy beyond the heavyweights. Look for value in Southeast Asia rather than China or Korea, suggests Abbas Barkhorder of Schroders. Return on equity in China has been “heading in the wrong direction since 2012 due to over-investment”, he argues.
India “remains expensive” among Asian markets, but offers some opportunities. The banking sector is attractive given “low banking penetration and private sector banks taking market share from state-owned ones”. Insurance also has scope for strong growth due to “low levels of insurance cover and a significant need for cover, given high out-of-pocket expenditure on healthcare”.
Recent performance of most of the Asia regional trusts has been very strong, led by Baillie Gifford's growth-focused Pacific Horizon (LSE: PHI) and Schroder Oriental Income (LSE: SOI). The market setback has knocked the region back by about 10%. This re-establishes absolute as well as relative value and provides an opportunity to invest for the long term.
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