Looking beyond China - Asian Equities

There are plenty of opportunities for investment in Asia outside of China, with investors particularly impressed with Taiwan and Japan, Malavika Santhebennur writes.

Asia is not a homogenous economy like Europe. It has multiple economies with different currencies, government policies, and market performance.

As last year's PwC report said, Asia is culturally and geographically varied, with multiple languages, religions, and traditions.

In 2014, the World Bank ranked countries on the ease of doing business. Singapore was number one, Hong Kong was number three, Malaysia was number 18, Taiwan was 19, and China was number 90 out of 189 countries.

Australia stood at number 10.

VIEW ALL

View all

Global strategy consulting team at PwC, Strategy&, released a paper titled ‘Doing Business Where Governance is Weak', which said the rankings showed that business models customised for the regulations and laws of advanced markets may not be suitable for Asian markets.

The authors, Ian Buchanan and Edward Clayton, said regulations in the Asian markets were "characterised by opaque regulatory climates, weak institutions, and invisible influence networks that may expose companies to unacceptable legal and reputational risks".

State Street Global Advisors' head of investment solutions group, Mark Wills, said it is best to divide emerging markets, or Asian markets into regional blocks.

"From the top of the house, if we think about the term emerging market equities, one of the big messages we've been telling clients is the worst thing they can do is think of it as one block," he said.

Advisers and investors should break it up into North Asia (China, Korea, Taiwan in particular, and Hong Kong to a lesser extent), and everything else.

Wills was not too impressed with Australia's options.

"If you're an Australian investor, our index is pretty horrible. You've got banks, rocks, and the telephone companies. In Asia, you can buy some of the best tech companies in the world."

In fact, technology made up only one per cent of Australia's stock market, but made up 20 per cent of Asia ex-Japan.

Taiwan, Korea, Japan

Nikko AM's Sartori and Wills were particularly impressed with Taiwan's performance, and rated it as the best emerging market in the world.

Wills said they had a well-established and sophisticated process in place, they had intellectual property impounded in them, and they were able to sell things in premium.

Taiwan invented products, and exploited the fact that they could utilise cheaper production costs in China due to the lower wages.

"So they've had this sort of win-win situation where they've got cheap production costs, but they've been able to manage the whole nightmare of dealing in China and the regulatory environment," Wills said.

Sartori said there was an opportunity to access strong companies in Taiwan that were 20 to 30 per cent cheaper now than what they were three months ago.

"Taiwan is a big tech market. They have well managed companies that are growing and doing very well," he said.

Wills was also optimistic about Japan, mainly due to Prime Minister, Shinzo Abe's economic reform, or Abenomics, a massive fiscal stimulus and a programme of monetary easing.

While his first attempt at a third arrow of economic reform in June 2013 was a dud, his second attempt last year held more promise.

This was because his second attempt was more broad based, and was poised to hit every area of the economy that needed change.

One of his major government policies was re-focusing on return on equity.

"So the thing is there's all these cross shareholdings Japanese companies have. That's now at the lowest level since the Second World War. So Japan appears now to be growing out of its 20-year deflationary slumber, and potentially getting back on its feet," he said.

Korea, on the other hand, was in a situation that Japan was in 25 years ago, and had a very rigid economy compared with Japan, according to Wills.

Korea had brands, intellectual property, and technical standards of excellence in their intellectual property like consumer electronics.

"There's somewhat of a very close relationship between large conglomerates and the Government. They're not as flexible in terms of their ability to change the workforce around, and they haven't been able to take advantage of much of the cheap labour in China," Wills said.

Although Korea had very good companies that made good products, issues like high levels of personal debt, bad demographics and a slowing growth rate had held the economy back, he said.

Click here to read Part 1 of this feature: Asian dragon lost its fire?
Click here to read Part 3 of this feature: Currying your favour – India