Deep Dive: European investors miss out on €200bn a year by not holding Asian stocks

Referring to research conducted by Olaf Stotz at the Frankfurt School of Finance, Monson said the associated costs of this bias for European investors was “substantial” and led to them forgoing risk‐adjusted returns of over 1.3% per annum by not being invested in the sector he described as the “most underrepresented region in global investors’ portfolios”.

The study also showed that Asia-Pacific (ex-Japan) stocks were undervalued by almost 20%, which results in Asian stocks’ valuation not fully reflecting “the potential of human capital or valuation ratios, which may help predict stock returns” in the medium and long term, according to Monson.

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He argued “there is no good reason” for investors to cut themselves off from the growth opportunities present in Asia, especially considering that, by 2050, three of the top five economies in the world are predicted to be Asian: namely China, India and Indonesia.

He said the first decade of the century was a “golden era” for Asian equities, boosted by the “consistently high and increasing GDP growth differential compared with the US”.

The 2010s were then focused on reform across the region, allowing US monetary support to propel its domestic tech giants to outperform.

Monson argued a “similar turning point” was now approaching for Asian equities, especially when considering the 50% increase in newly listed companies over the past decade, compared to shrinking numbers for the US and UK markets. 

For investors seeking to amend their underexposure to the region, Juliet Schooling Latter, research director at FundCalibre, pointed to four portfolios that could help increase exposure to Asian equities.

Performance of portfolios vs sector 

The Ninety One Asia Pacific Franchise was a quality growth strategy, focusing on larger companies and “ignoring cyclical and lower parts of the markets”, Schooling Latter said.

For those seeking a contrarian approach, she highlighted the Federated Hermes Asia ex Japan strategy, which invests in companies “currently out of favour” but are believed to perform better in the future, she added.

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The Matthews Pacific Tiger fund was highlighted for its focus on the Asian consumer sector and its ability to “differ from the benchmark” and its aim to invest in “long-term Asia winners”.

On the income side, Schooling Latter pointed to the Schroder Oriental Income fund, which has offered a “consistent growth in dividends since launch” with increases for 16 consecutive years.

Monson said: “The opportunity set in Asia continues to expand dramatically, and being a part of this growth is truly exciting.”

‘Tactically opportune time’

Robert St Clair, strategist at Fullerton Fund Management, agreed with Monson, noting there were “multiple structural trends” supporting the prospect of strong returns from Asian equities.

Rising consumerism, IT and value-added industrialisation in the region were all major macro-trends the strategist highlighted.

He said: “Rising consumerism in Asia is driven by sustained growth in per capita income and an expanding middle class. This is expected to create alpha opportunities across Asia’s consumer-linked stocks, particularly in branded goods and e-commerce, as the consumption share to GDP increases.”

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Sat Duhra, co-portfolio manager of Henderson Far East Income, said telecommunications and the construction of 4G and 5G technologies, alongside infrastructure and renewable energy, all presented opportunities as well.

The trust recently added to its stake in Power Grid, India’s largest electric power transmission utility company, which has been increasing its payout ratio – currently a greater than 5% dividend yield.

One sector in which Duhra decided to reduce exposure, however, was Australian liquified natural gas.

He said while oil and gas producer Woodside Energy was one of the portfolio’s “best performing stocks”, the recent fall in LNG pricing and increased regulatory burdens “forced us to reduce the position significantly”.

“The structural LNG story remains intact, but we would expect these names to take a breather after recent performance,” the manager added.

St Clair noted Asian equities also served as a diversification tool to Chinese equities and developed market indices.

“Equally, the Asian opportunity pool has great depth, boosted due to China’s size,” he said.

“Asia has ten times more companies with a market cap of more than $10bn compared to Latin America, and six times more compared to EMEA. Moreover, it is a tactically opportune time to gain Asian equity exposure, with significant downside already reflected in earnings expectations and attractive valuations.

“Given the low hurdle, any positive surprises may trigger a further rally in this space,” St Clair added.

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