Over the past few weeks, fears about the coronavirus have been rattling stock markets worldwide. Initial hopes of a speedy containment were dashed as the virus continues to spread, particularly in China, which records the highest number of cases. Chinese manufacturers have been enduring factory shutdowns since late January, and this has affected its geographic neighbours in Asia as well as global supply chains.
Even before the outbreak of the coronavirus, growth in China had been slowing due to the ongoing US-China trade war. Given that China is dominant in its region, its slowdown has impacted other Asian economies such as India, Malaysia, Thailand and Japan. Does that mean it’s too late to invest in Asia?
When stock markets are falling, contrarian investors tend to “buy the dip” – and buy stocks while everybody else is selling them. But others say the current crisis is unprecedented and stocks may continue to fall on fears of a global recession. While it’s impossible to know what the near future might bring to stock markets, it’s worth considering the long-term picture.
Long-term investors tend to have a time horizon of at least five to ten years. And having a wide range of investments spread across the world – rather than just focusing on stocks in your own country, for example – is key to successful investing.
So, what are the benefits and drawbacks of investing in Asian stock markets? It’s worth bearing in mind that Asia is a very diverse region, and it is home to some 60% of the world’s current population. In comparison, Europe has less than 10% of the world’s population.
One of the main benefits of investing in Asian economies is what professional investors call their “growth story.” Not only are Asian populations large, but their middle classes and levels of wealth are increasing. This means they have growing bases of consumers.
In 2018, there were about 1.9 billion mobile internet users in the Asia Pacific region, and the figure is rising. Think of the sheer scale this provides companies in e-commerce and tech with. Compare, for example Facebook, which has a market capitalization (the total value of all a company's shares of stock) of $481 billion, to China’s Alibaba, which is worth $531 billion, according to Bloomberg data.*
But one of the main downsides of investing in Asian markets is their high volatility and unpredictability. For example, the MSCI China – which is an index for large and mid-size Chinese companies - returned 23.6% in 2019, but lost 18.8% in 2018. The MSCI Korea Index gained 13.1% in 2019 but lost 20.5% in 2018. However, investment fund managers tend to see such volatility as an opportunity to pick up some bargains.
It is said that emerging markets have the potential to outperform developed markets. But the drawbacks often include less transparency, and a riskier political backdrop. Chinese authorities, for example, influence how companies are run, which makes corporate governance less reliable.
Another possibility to invest in Asia is by focusing on a highly developed economy like Japan. Since taking office in 2012, Japanese prime minister Shinzo Abe has introduced a variety of reforms to make the stock market more shareholder-friendly, as well as bringing in labour-market reforms to stimulate the economy.
While Japan has been struggling with an aging population, high national debt, deflation and poor investment returns, it has also invested heavily in robotics, and is one of the leading countries in this area. Japanese stocks are considered to be reasonably priced (compared to US stocks, for example) and some investors argue that Japan’s prospects are promising.
Those who are prepared to face the risks and would like to invest in Asia could opt for a country-specific fund, or buy a fund that spreads their money across the region.
Investors interested in Asian markets might want to consider passive investment funds that track local stock markets such as the iShares - Pacific ex Japan Equity Index fund or iShares - Japan Equity Index – both of which are selected by our independent investment research partner Square Mile.
Alternatively, those looking for a more actively managed position – where a fund manager makes decisions on what to invest in on your behalf could look at Square Mile selected funds First State Asia Focus and Baillie Gifford Japan.
*Correct 8 April 2020
Lucy Loewenberg has written about investment and retirement for MoneyWeek and the i newspaper. In her articles, she has covered practical advice on how to be a better investor and how to get compensation for a mis-sold pension. She also enjoys analysing the bigger picture and has charted the rise of investment clubs, the appeal of private banks and the inside workings of wealthy family offices.