Emerging Asia keeps sizzling. The MSCI Asia ex-Pacific index has more than trebled over the past five years and hit a record high last week. Investors have become increasingly aware that Asia is “ideal for the long-term investor”, says Hugh Young of Aberdeen Asset Management. Emerging Asia has been growing at around 8%, with China and India jointly set to contribute 43% of global growth this year, according to Merrill Lynch. Since the Asian financial crisis, governments have pared debt and built up exchange reserves; exports are booming amid strong global growth and expanding middle classes are fuelling consumption.
McKinsey, a consulting firm, reckons that, by 2025, China and India could have up to three times more consumers than America has citizens. And nowhere in emerging Asia do mortgage loans comprise more than 35% of GDP, compared with 90% in the UK. There has also been structural improvement on the corporate front, with debt down and profitability up. As for the shorter term, increased domestic investment, rising exports to rapidly growing emerging markets and reaccelerating earnings momentum all bode well, says Merrill Lynch. Still, valuations look historically high with the region on a p/e of just under 15 – although profit growth is strong at a forecast 13% this year. And emerging markets guru Mark Mobius, while still fully invested, warns that strong gains seem unlikely now, given the huge run-up since 2003.
Young says a market slide within the next year is a distinct possibility, but the strong long-term story suggests it should be made up rapidly. “The markets have barely got going,” he reckons. So this may be a good time for long-term investors to exploit recent fears that China’s market wobble could spread, which have left many Asia ex-Japan investment trusts trading at unusually large discounts to their net asset value. Paul Locke of Teather & Greenwood highlights the Aberdeen New Dawn and Asian Smaller Companies funds, along with Pacific Assets. Bestinvest’s Justin Modray likes Schroder Asia Pacific and Edinburgh Dragon.
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