Asian equities - eyes on the tigers

As the boom in the Australian economy recedes, investors from this country are beginning to look at rising Asian equities as a strategy to boost returns – but a sense of caution remains, writes Janine Mace. 

Related: US quantitative easing throws Asian equities into a tailspin

Are local investors finally ready to take the plunge and begin shifting their money into Asian equities? 

It’s a question with a lot riding on it and one investment managers in the Asian markets’ cheer squad have waited a long time to answer in the positive. 

They may be about to hear some good news if the opinions expressed in the Certitude Global Investment Intentions Index (CGIII) are anything to go by, says Certitude’s CEO Craig Mowll. 

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Not only are local investors more interested in global investments, they are also becoming more serious about actually allocating assets overseas, with 43 per cent of respondents stating they needed more international exposure in their portfolios.  

“This has remained consistent over the past quarter. What has changed is that their intention to act on it by increasing their overseas assets has risen steadily. We have seen investors bring forward the decision, with 36 per cent bringing it forward to the next three months,” Mowll explains. 

Although market volatility saw declining investor interest in Asia in the previous survey, the situation has reversed.

“Now Asia is the second highest ranking geography where people are looking to invest,” he notes. 

The CGIII, conducted by research firm Investment Trends on behalf of Certitude, measures “what SMSF and real investors intend to do, so we are getting a completely different angle in the value chain”, according to Mowll. 

The August survey found Australian investors have strong investment intentions toward Asian markets. 

“China has had a real incline from 10 per cent to 15 per cent in investor intentions and is now in the fifth spot. Interestingly, emerging markets is broadly on the decline, versus an incline in Japanese and Chinese intentions,” Mowll said. 

‘Getting’ Asia 

To explain the growing interest, Mowll says many Australian investors now understand Asia and “get the story” as we are part of the region. 

“Asia itself is a tangible proposition for most Australians and many feel part of it. A lot of people are looking to Asia generally for growth and that is not limited to just the China story.” 

Australian Unity Investments (AUI) CEO/CIO David Bryant agrees there has been greater interest in investing in Asia over the past six to 12 months.  

“Advisers are slowly warming to the idea of Asia. Ten years ago we were getting boom returns in Australia, so they felt why look at Asia and the currency risks that go with it,” he explains. 

“Until the past 12 months, investors were concerned about risk and were in a risk-off environment, but now the world is moving onto a growth footing in many economies, Asia is genuinely being considered.” 

Mowll believes changing domestic conditions are also playing a role. 

“In Australia, we are overweight Australian equities and overweight domestic property and Australian cash, and this is why there is increasing interest in investing globally.” 

Another driver could be the very impressive results some Asian funds have chalked up over the past year. The Macquarie Asia New Stars Fund for example, returned 61 per cent in the 12 months to 31 July (see Table 1). 

According to Alex Prineas, fund research analyst with Morningstar, some fund returns are well above the MSCI All Countries (ex Japan) Index return of almost 25 per cent in Australian dollars.  

Many of the results are courtesy of strong individual stock performances. 

“The best-performing funds were helped by specific stocks such as Baidu – the Chinese competitor to Google – which increased 40 per cent in a few months,” he explains.  

The global hunt for yield and security, together with the drop in the Australian currency, have also added to returns.

“The dollar being down has significantly boosted returns. If there is a drop of 10-15 per cent, that reduction is added to the return,” Prineas says.  

Inflow facts 

Although investor and adviser sentiment towards Asian equities may have changed, the dollars are yet to follow. 

“We have seen some rotation to growth and international equities, but Asian equities have not benefitted from that,” notes Prineas. 

Global equities have seen inflows of A$2.58 billion versus total assets of A$84.8 billion, which is a meaningful amount in proportion to the assets in the global equities sector (see Table 2). 

Although inflows may be slow in Australia, managers like Macquarie, T.Rowe Price and Aberdeen have been successful in raising assets in Asia itself, Prineas says. 

“A lot of funds are available to foreign investors and only a small portion are Australian investors,” he says. 

Bryant agrees significant assets flows are yet to follow the interest. 

“Everyone marvels at China and the more mature Asian economies and they know the opportunities, but people have not put money there.” 

Stuart Rae, Alliance Bernstein’s Hong Kong-based CIO of Pacific Basin Value Equities, agrees inflows into Asian equities are yet to really materialise. 

“People are cautious at the moment due to the uncertainty in the macro environment. We have seen greater flow into Asian yield and fixed interest services than equity services,” he says. 

Once the current uncertainty fades, Rae expects to see new money flow into Asian equities. 

“The QE tapering has led to hot money outflows, but the stabilisation of economies such as China will see a return to investing in the future.” 

Aside from the current concerns about global liquidity, Bryant believes a number of myths about governance and corruption still linger about Asian markets, despite the GFC and recent financial scandals in the West. 

“Asia is better than people think and closer to the West than most believe,” Bryant says. 

John Drakakis, senior financial adviser at Queensland firm Snelleman Tom, agrees many clients and advisers are still scared of risk and volatility in the wake of the GFC, but believes it should not deter the right type of investor from Asian equity investments. 

“We see it as an opportunity that is not for one-to-three years, but a true 10-plus year growth opportunity.”  

Assets staying put 

Despite the concern, the recent volatility has not caused significant outflows from Asian equity funds. 

“There has been $119 million in outflows in Australia from Asian Equity funds in the year to 30 June, but there is $6.2 billion invested in Asian funds so it is less than 2 per cent, which shows Australian investors are not responding to the noise in the market,” Prineas notes. 

“The Asian outflows are largely concentrated on particular countries – Japan and China funds. Broader Asia ex-Japan funds have seen positive inflows of around $66 million, which is still small versus the $5.5 billion in Asia ex-Japan assets.” 

Some allocations to Asian equities are also going into broader international equities funds, he says. 

“We saw improved inflows into international equities, especially just before the Australian dollar dropped.” 

In part, this may be due to doubts about the right way to access Asian markets.  

“There is a dearth of product available in Australia,” Bryant claims. “We need greater levels of products to get access for local investors.”  

Mowll believes some of this is due to the regulatory framework. 

“The Australian market is a very well regulated market, but that can make it harder for offshore managers to bring funds into the market.” 

From an adviser perspective, there are definite concerns about accessing appropriate product strategies. 

“We have always believed in the Asian growth story as a 10-year investment. The difficulty for investors has been the way to get access to this market,” Drakakis explains. 

He believes many of the offerings have not been connecting to the true Asian growth story.

“They are invested in companies like Sony or Samsung that produce global products and are originated in Asia, but are really global stories. They do not access true Asian growth story opportunities such as the increase in the middle class and attractive demographics.” 

Companies need to have the majority of their profits and revenue generated from local consumers to be a true play on the internal growth story, Drakakis says.  

“There is a big opportunity to tap into the Asian growth story, as it is more than just a resources story. The average Australian investor is very biased towards Australian equities. There may be a lack of understanding as well and a fear of the unknown, as these are not well-known names.” 

Bryant agrees resources companies are not a substitute for investing in Asian equities. 

“The great fallacy is that you can invest in Australia instead of Asia, as it is a proxy for Asia. The correct observation is our market is dependent on Asia, but Asia is not dependant on us.” 

To really access the potential growth in Asia, local investors need to go outside their comfort zone. Bryant believes increased product availability will drive discussions about both the opportunity and the many strategies investors can use to access growing Asian companies. 

“We should have more Asia equity products than Australian equity products,” he says. 

Some advisers appear to agree, as AUI launched its Acorn Capital Asia Small Caps Fund at the start of the year and seeded it through assets from local advisers. 

“The exciting thing is it is a very raw market, as this is where a lot of corporations are being developed. There is an opportunity to differentiate and find companies that are growing,” explains Bryant. 

“The very high growth is in small caps and it is exciting, as there is an information advantage. There has been less research done by the big houses, as many of them cut resources to the area post-GFC.” 

Although Morningstar has positive ratings on both active and index funds in this space, Prineas says its highest ratings go to actively managed funds like Platinum Asia and Aberdeen Asian Opportunities, because they have proved they can add value. 

“Some active strategies clearly add value over the index, so it is not a sector where indexing is the obvious choice,” he says. 

He is less convinced there is a need for more products. 

“Investors can get exposure through international equities funds, so there is enough quality offering in the area.” 

However, Prineas recognises there are access issues for investors. 

“The sector is top heavy with large managers and most have high funds under management and often are soft closed to new investors,” he says.  

Value or growth? 

The growing popularity of Asian equities is seeing some managers respond with new funds and strategies.  

This makes it essential to understand what the strategy is trying to achieve, Prineas says. 

“Platinum and Aberdeen pay little heed to the benchmark, meaning returns can vary markedly. Macquarie Asia New Stars focuses on small and mid-caps.

"Some strategies have a greater exposure to emerging markets, others focus more on developed markets. Many funds can also invest off-benchmark in countries like Sri Lanka.” 

Although most funds are seeking to exploit the growth potential of Asian companies, Rae believes there is also merit in taking a value approach in the Asia ex-Japan market. 

“Most people invest in Asia for high growth, but there is a lot of people doing the same thing. This leads to a focus on ‘winners’ and the valuations go up and the stocks become expensive,” he explains. 

The big pricing difference between popular and unpopular companies in Asia can be exploited to make attractive profits. 

“People are unwilling to look at things that are out of favour, but companies can turn themselves around. For a value manager, there are a lot of opportunities in companies which may be too cheap,” Rae argues. 

Hot market areas like the Chinese internet and smartphone space have become quite expensive, while unfashionable areas like housing are cheap. 

“People don’t like the housing market due to the perceived risk, but it is still a good market and companies are very cheap. The gap is huge between the housing market and the internet market.” 

According to Rae, the hunt for growth in Asia means investors are creating opportunities in other corners of the market. 

“It’s counterintuitive. It is not common in emerging markets to take a value approach, but the opportunities are there and they are significant.” 

Drakakis believes advisers need to look closely at the new investment options being launched for Asian equities and match them to client segments seeking specific outcomes. 

“It is for clients that want as an outcome to achieve a better result than the market, so they need to be exposed to greater risk. They also need to be willing to accept plenty of volatility along the way,” he says.