A more challenging environment so far this year indicates that investors have to be more selective in where and how they invest to continue capturing value. Fidelity’s investment experts offer these ideas to break away from the pack.
Asian equities were among the top global performers in 2017. Local bonds – sovereign, investment grade and high yield – also offered some of the most attractive yields.
However, some of the tailwinds for Asian economies are weakening. Growing US protectionism could disrupt global trade and pose risks to the entire region, while rising US yields and a strong dollar have put pressure on emerging market currencies.
Slowing growth in China as a result of tighter financial conditions is also a concern for the region, along with signs that the tech cycle might be rolling over, hitting demand for manufacturers.
With much of the good news already priced in, the key challenge for investors is to find value in a more volatile environment.
Here are three ideas for uncovering hidden value in Asia at the moment:
1. See the upside promise for ASEAN equities
Asia is not a monolith. Despite very strong equity returns across the region last year, performance varied. So far in 2018, South East Asian equities have been particularly weak, led by Indonesia and the Philippines. It proves that although these markets are typically more defensive than the broader Asian market, they are not immune to bouts of volatility, in this case largely due to concerns about a stronger dollar.
The domestic outlook for ASEAN countries is improving, however, with many expected to see GDP growth over five per cent in 2018 and 2019. This should help strengthen corporate earnings and the quality of financial assets. Valuations are relatively cheap compared to five-year averages and this could be an attractive entry point for investors who believe there is a limit to how far the US dollar will strengthen.
Read more about the Fidelity ASEAN Fund, which invests principally in equity securities quoted on stock exchanges in Singapore, Malaysia, Thailand, the Philippines and Indonesia.
2. Decouple from market weightings
Basing equity allocations on index weights tends to concentrate risk in highly valued securities, sectors and regions. Investors who allocate according to market weightings are now likely to be overweight in Korea, Taiwan and Hong Kong equities, and within these markets, they are likely to be favouring tech, banking and real estate stocks.
The tech sector now represents almost a third of the MSCI AC Asia ex-Japan index, thanks to the market cap of internet giants such as Tencent, Alibaba and Samsung. Instead of allocating based on performance so far, there is real value to be found from delving a little deeper into the opportunities on offer.
Domestically-focused sectors that are likely to benefit from growing consumer confidence look attractive relative to the valuations of tech and financial stocks. These include retailers, hotels, cosmetics, healthcare and luxury goods. In addition, a focus on corporates that are adopting more generous dividend policies might provide an income windfall for investors.
3. Consider China’s deepening investment markets
China’s domestic (onshore) equity and bond markets are opening up, offering investors an interesting new source of yield and opportunities. China onshore bonds have recently exhibited a very low correlation with other global defensive assets, making them a particularly useful diversification tool for investors.
In addition, Chinese dim sum bonds (bonds issued outside China but denominated in renminbi) have a low sensitivity to interest rates.
This can reduce volatility compared to many other global bonds, as well as offer attractive yields and positive supply and demand dynamics caused by the growth of the onshore bond market. The downside, of course, is the currency risk of renminbi-denominated instruments.
Nevertheless, the liberalisation of China’s asset markets – the equity market is the world’s second largest by market cap – can only be good news for global investors. The initial addition of onshore Chinese securities to major global equity and bond indices is a key first step for opening access to a fuller range of opportunities in China.
Read more about the Fidelity China Focus Fund, which provides early entry into attractively-valued Chinese companies that have gone unnoticed by the broader market.