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Wealth Insights Podcast 3

January 2023

Is Asia ex-Japan a risky investment proposition?

Vasu Menon,
Executive Director,
Investment Strategy,
Wealth Management Singapore,
OCBC Bank

Investors have come to accept that risks and uncertainties go hand in hand with investments and may remain as a fixture in the investment landscape for years to come.

Many also realise that waiting for the proverbial ‘clear blue skies’ to signal an entry into markets may mean missing out on good investment opportunities.

No doubt risks and uncertainties remain on the horizon, but overall, we think that the investment outlook remains positive, and would likely be so for the next few years.

So, there are good reasons for investors to continue investing in risky assets like equities. In fact, within the equities space, we are positive on the Asia ex-Japan region.

Asia ex-Japan region no longer as risky as it used to be

Asia ex-Japan may seem like a risky region to some; many Asian countries that make up the region are regarded as emerging or developing markets. Such markets can be volatile, due to political or economic instability, for instance.

However, investing in Asia ex-Japan is no longer as risky as it used to be in the past.

Asia ex-Japan could have been a risky proposition in the 1970s, 1980s and 1990s. In fact, the Asian Financial Crisis in 1997 came to be because of excesses in the region and poor economic management.

However, over the past two decades, the region has tightened its belt and made significant changes. We have seen big improvements in areas like economic policy and corporate governance. The good news is that Asia ex-Japan is now seen as a source of high-growth investment opportunities.

Today, Asian companies are more transparent and place a lot more emphasis on shareholders’ interest.

Asian companies pay better dividends than they did 20 years ago. This has gone down well with global investors, which clearly augurs well for Asian stock markets over the medium term.

In fact, dividends tend to account for a large proportion of total returns when investing in Asia ex-Japan equity markets.

The region’s earnings growth is also expected to see a strong V-shaped recovery in 2021.

Second, the strong economic growth in China will benefit the rest of Asia. China has done a good job in managing the pandemic, and we expect the Chinese economy to grow at an exceptional rate of about 8% this year, which is one of the highest growth rates in the world.

Third, Asia ex-Japan has generally done a better job in containing Covid-19 versus its Western peers and even Japan and this augurs well for the region’s stock markets, as economies are likely to return to normalcy sooner rather than later.

Fourth, countries in Asia have ample policy space to respond to potential economic shocks, be it through monetary or fiscal policies, versus their Western peers.

As it stands, Asian economies have been prudent in exercising their fiscal powers whereas their developed market peers have been quick to pass expansionary fiscal policies, with price tags of over 10% of GDP.

In terms of monetary policy, interest rates in the developed world, including the US, Eurozone, the UK and Japan, are already close to or below zero. By contrast, with interest rates relatively further away from the zero-lower bound, Asian central banks have some monetary policy space to manoeuvre should their economies require more stimulus support.

Finally, as the global economic recovery gains traction, we expect value or cyclical stocks to outperform growth stocks in the next 12-18 months. Asia has a large representation of value stocks in its stock markets, and it is therefore poised to benefit from this rotation play into value and cyclical stocks.

How best to invest in Asia ex-Japan equities?

On the question of how best to invest in Asia ex-Japan equities, one good way is through a diversified investment vehicle like a unit trust.

But for those with good knowledge of specific companies, they can also consider buying individual stocks, although this comes with greater risk.

While we remain broadly constructive on Asia ex-Japan equities, we believe there are select opportunities within the region that merit greater attention, particularly because they are attractively valued.

After all, investors did not spread the love equally during the 2020 market. Your usual suspects, namely growth sectors like healthcare and information technology, were the main beneficiaries of capital inflows back then.

Other sectors like real estate, energy and financials underperformed the broader index as investors shunned cyclicals for the perceived security of “stay-at-home” winners amid the global pandemic.

This year, financial and energy stocks have recovered some lost ground on the back of steepening yield curves and rising commodity prices but are still far from the highs of growth stocks. Meanwhile, the real estate sector has underperformed its peers, and therein lies an opportunity.

Bottomline

And while stock market valuations may look somewhat extended from a 5-, 7- and even 10-year perspective, they are not excessive. Especially given ultra-low interest rates which allow room for more PE (price/earnings ratio) expansion.

With interest rates in developed countries wedged at near zero levels, the positive interest rate differentials between Asia ex-Japan and these developed economies, in addition to better economic fundamentals, may continue to attract global capital flows into Asia ex-Japan.

Other positives – in the form of a recovering earnings picture, a weaker US Dollar, higher commodity prices, a more stable and predictable geopolitical environment, along with the earlier mentioned brighter growth prospects as vaccine distribution kicks off in earnest – suggest possibly higher upside for Asian equities are in store.

In a nutshell, Asia ex-Japan has good medium- to long-term potential. Investors clearly cannot afford to ignore this region in the coming months and even years.

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