Four ways to get exposure to Asian equities
Identifying megatrends is the easier part of investing. Knowing when to buy into a megatrend at sensible prices, and having the nerve to stick with the idea, is the bigger challenge.
Consider Asia. The middle-class consumption boom in emerging markets – a trend I have followed closely for the Switzer Report – is the mother of all megatrends. Another two billion Asians are expected to join the global middle class by 2030, on OECD forecasts.
Gaining long-term portfolio exposure to faster-growing Asian economies makes sense.
Yet most Self-Managed Superannuation Funds (SMSFs) are underweight global equities, judging by Australian Taxation Office data. SMSFs that have offshore exposure tend to favour developed rather than emerging markets.
Diversification is key. A growth portfolio (five years to retirement) could justify 5% of assets in Asian equities and another 5% in emerging markets. A moderate or conservative portfolio (near or in retirement) would have far less or no exposure.
Having 10% of a growth portfolio exposed to higher-growth Asian economies will make a difference over time, provided investors can tolerate a negative year of returns every four to five years. Asia is a long-term idea for long-term portfolio investors.
The key is buying into the Asian growth trend at lower prices. There have been more signs this month that the US-China trade war is hurting global economic growth more than the market expected. The US ISM manufacturing index – a key barometer of US economic strength – has hit its lowest point since 2009.
Germany, the world’s fourth-largest economy, is on the brink of recession (or already in it, according to some forecasters) after a larger-than-expected decline in factory orders. And Britain’s tumultuous potential exit from the European Union is weighing on European trade.
Predictably, the World Trade Organisation has more than halved its forecast for trade growth for this year and next. The WTO expects global trade expansion to be the worst since 2009.
A deteriorating global economy is bad news for Asia. The Asian Development Bank late last month slightly downgraded its growth forecast for the region to 5.4%, from 5.9% a year earlier. Trade conflict is sapping the region’s growth.
But 5.4% expected growth this year looks like a boom compared to developed markets. Australia’s annual economic growth of 1.4% is the worst in more than a decade, forcing the Reserve Bank to cut the cash rate and fuelling expectations of more cuts ahead.
The US Federal Reserve is expected to cut rates again after the dismal manufacturing data and there is more than $22 trillion of sovereign bonds with negative rates. Simply, investors in parts of Europe and Japan are paying governments to hold their money, such is the uncertainty. That’s a sign of future economic distress.
Asian equities have been caught in the crossfire. The MSCI Asia ex Japan index – a barometer of 984 Asian stocks across 11 countries – is down 3.4% in the year to September 2019, MSCI data shows. That follows a 14% fall in 2018, after booming gains in 2017.
Further falls are likely as global growth slows. The flipside is that slowing growth could encourage a US-China trade truce, which would be unambiguously good for markets.
Either way, the case remains for Australian retail investors to ensure they have sufficient exposure to Asia, relative to their risk profile, investment horizon and goals.
Here are 4 ways to get that exposure.
Each suits experienced, long-term investors who understand the risks of investing in the region.
1. APN Asian REIT Fund
The unlisted fund invests in Real Estate Investment Trusts (REITs) in Asia. About 41% of the fund was invested in Japanese property at September 2019. By sector, about two thirds of the fund was invested in retail and office properties.
The fund returned 31.4% over one year, thanks partly to the falling Australian dollar and lower interest rates making interest-rate-sensitive stocks, such as REITs, more attractive. Over seven years, the REIT’s annualised average return is an impressive 15.6% (after fees).
I have followed this fund for several years, principally because investing in quality property in developed and emerging Asian markets is a lower-risk way to play the region. The fund’s performance has vindicated that view, but it has a relatively low profile given its returns.
2. iShares Asia 50 ETF (IAA)
The ASX-quoted Exchange Traded Fund (ETF) provides exposure to 50 of the largest Asian stocks across China, Hong Kong, Macau, Singapore, South Korea and Taiwan.
IAA returned 2.78% over the year to September 2019 as tech stocks retreated from their high. Over five years, the annualised return is 12.59% and over 10 years it is 9.45%.
Just over a third of the ETF is invested in China and companies in the financial, information technology and communication sectors dominate. Simply, the fund is stacked with multinationals, making it a relatively lower-risk way to benefit from Asia’s growth.
A management fee of 50 basis points is competitive for this type of ETF.
3. Betashares Asia Tigers Technology ETF (ASIA)
True believers in tech need to look beyond the Nasdaq exchange in the US to Asian companies that are revolutionising the region through technological disruption.
Launched in September 2018, the Betashares Asia Tigers Technology ETF provides exposure to 50 of the largest technology and online retail companies in Asia, excluding Japan.
Almost half of the ETF is invested in China and there is a strong focus on companies in the semiconductor, internet and interactive media and services industries. The ETF’s 10 top company holdings are a “who’s who” of Asian tech giants.
The index over which the ETF is based delivered a negative 2.3% return over one year to September 2019. Over three years, the annualised return is 13.27%.
Expected growth in technology and Asia are a compelling combination. Buying into that trend after a weaker year for Asian tech stocks should appeal to those who have a bullish long-term view on the region’s tech giants.
4. ETFS Reliance India Nifty 50 ETF (NDIA)
Commentators for years have written about India becoming the next “China” for Australia in terms of export opportunities. Yet there have been few specialist listed vehicles for retail investors to access investment opportunities in India.
ETFS Securities’ Reliance India Nifty 50 ETF is an interesting newcomer. It tracks the Nifty 50 Index – the flagship index of the National Stock Exchange of India – and its largest companies.
Although India’s growth is slowing faster than expected, it remains the world’s fastest-growing major economy. The Reserve Bank of India this month lowered the growth outlook to 6.1%, from 6.9%. Most countries would love that type of growth in a slowing global economy.
NDIA is part of a new breed of India-focused ETFs and active funds being offered to retail investors. The BetaShares India Quality ETF focuses on the 30 largest Indian companies.
Active managed funds that specialise in Indian equities are another option. The Fidelity India Fund, a unit trust, holds a diversified portfolio of 50 to 70 Indian companies. The fund has performed well over short and long periods. The one-year return is 13.8% to September 2019; over seven years the annualised return is 15.4% - about 3 percentage points ahead of the fund’s benchmark index.
Long-term investors who want exposure to India, which has years of higher growth ahead as it industrialises, should consider India-focused ETFs or active funds, provided they understand the higher risks of investing in India.
India will be at the epicentre of the middle-class consumption boom in emerging markets in the next decade or two. The time to buy into that trend is when global growth is slowing and investors are becoming nervous, mindful that there will be occasional years of negative returns and recurring bouts of volatility in India and other emerging-market equities.