Asian equities could prove safe bet for long-term investors

It is easy to understand why global investors regard Asia with a combination of scepticism and trepidation as they are worried about slowing Chinese growth and tapering concerns. But by analysing those two elements in detail it is possible to relieve some of that fear.

We believe global growth will remain sluggish and as there are still deflationary pressures, tapering will not mean the end of quantitative easing (QE), which will therefore be  supportive for some Asian equity markets in the short term.

China’s new leadership, installed in 2012, has launched a major overhaul of the country’s economic and political structure with an impressive list of measures such as reformed property and land use rights, a major overhaul of the national healthcare delivery system and a relaxation of the one child policy. All of these initiatives could benefit the domestic economy. In recent weeks, Chinese authorities have added selective mini stimuli in order to support growth and achieve their 7.5 per cent target.

The foundations for long-term growth in Asia continue to be strong. Favorable demographics, continuous much-needed infrastructure investment and an unfolding domestic consumer story all mean the region will remain a key engine for global growth. Asia’s governments have strong finances, consumers are not overleveraged compared to Western standards, corporate balance sheets remain healthy and debt levels manageable.

In addition, Asian equities appear great value, with the region trading at a significant discount to developed markets.

Once convinced of the benefits, the question is how to invest? We do not think we have to follow a special approach to select an Asian fund. The analytical work we undertake is similar to the one followed in other regions.

As a funds of funds manager, our main investment universe consists of actively managed funds. In Asia, as in emerging markets, this is especially true as there are still inefficiencies in the markets that allow active managers to deliver consistent alpha over market cycles. Our use of trackers is more tactical, when we identify a short-term opportunity in a single country.

Selecting a new fund is the result of combining quantitative and qualitative analysis. Quantitative analysis relies on historical data and that is clearly not enough for assessing a good manager. Meeting portfolio managers allows gaining a greater insight into the biology of a fund – to understand where performance is coming from and if it is repeatable – which can help anticipate the fund’s behaviour in different market conditions.

With more than 2,000 funds, Asia ex Japan offers investors a a wide variety of ways into a region comprised of several nations which each have their own key engines.

The first element to distinguish is the geographical focus of funds. Some are centered on the Asean countries, while some exclude India or Australia. For an investor seeking just one fund, we think the best option is to invest in the Asia Pacific area. It provides the broadest diversification, as well as the largest universe, as it also includes Australia, which may not be considered as an Asian economy by many, but is helpful to reduce volatility.

As to the question “does a local manager do better than one located outside the area”, the answer is not so easy. Most of the funds are managed locally and clearly it could appear to be an advantage, but very good managers can be found in Europe or the US. The key here is that those fund managers rely on analysts based locally and/or those who have extensive local experience of those markets.

Regarding styles, no single approach is right or wrong. What matters is whether the manager has a strategy employed consistently, which can be clearly explained to investors. It is important for the fund manager to not deviate from this strategy, because very few managers are successful when they begin switching styles in response to evolving market conditions.

Finally, the kind of managers we look for are those who pick high quality growth companies, looking for earnings growth but also paying attention to valuations. There is also a theme we have been emphasising in recent years and to which we still pay more attention: dividend income. The universe of dividend paying companies has expanded significantly in recent years and is becoming a key source of income.    

Amparo Sampedro, head of funds of funds, Generali Investments Europe