The performance of Asian funds has been dented by weak and declining sentiment towards emerging markets, and China in particular. However, some fund selectors believe that opportunities may be emerging in the region and low valuations offer a good entry point for investors looking to the longer-term.
Asian equities have certainly suffered an annus horribilis. After Japan equities and emerging markets, Asian equities is currently the next worst performing sector over the past twelve months and continues to be dragged lower by poor sentiment towards China. Although manufacturing data appear to suggest some stabilisation in the region's largest economy, fears still remain about the health of the banking sector and growth prospects. The average Asia inc. Japan fund has dropped 7.7%, while the average Asia ex Japan fund is down slightly less at 4.9%.
Fund Selectors Tentatively Return
However, some fund selectors are suggesting that this might be a good entry point for the sector, where longer-term prospects remain good. For example, Tim Cockerill, head of collectives research at Rowan Dartington, says: "After the talk on tapering, the whole area was hit. There is concern over China and the whole region is out of favour. However, investors shouldn't write off the region in the long-term." He points out that the 10-11% discounts available on some of the Asian equity investment trusts are attractive for investors willing to sit and wait.
Gavin Haynes, investment director at Whitechurch Securities, also believes there may be selective value in the sector, highlighting trusts such as the Schroder Oriental Income (SOI), managed by Matthew Dobbs and rated Silver by Morningstar analysts.
Hugh Young, Head of Asia Pacific equities at Aberdeen Asset Management, says: “Markets that sold off sharply last year appear to be making up for lost ground. India and Indonesia, for example, have been rewarded by investors for their efforts to fix domestic imbalances and, should policy continue on the right path, both markets could enjoy further gains. Elsewhere, the rebalancing process could take much longer and slower growth in the interim is inevitable, as is the case for China.”
Margin Improvements
Young adds that: "At the corporate level, companies in the region are still facing slowing exports and weak internal demand, exacerbated by higher costs. However, prudence is starting to bear fruit and we are seeing some margin improvements come through. Companies able and willing to exercise caution now should reap the benefits further down the road, backed by the region’s rising wealth and favourable demographics.”
Schroders' Matthew Dobbs points out that the economies of Asia continue to boast stronger growth than the economies of the west and the region also contains many dynamic and vibrant companies. He adds that the problems within Asia are at least laid bare and factored into markets, unlike in developed markets.
Investment Trust Discounts
It is notable that fund selectors are recommending investment trusts to participate in any recovery. Discounts in the sector have widened. For the non-income focused trusts, discounts vary from 3.2% for First State's Scottish Oriental Smaller Companies trust, to 11.2% for the Fidelity Asian Values trust (FAS). The latter is rated Bronze by Morningstar. If the region recovers, discounts may narrow; if a trust is geared, the potential returns are even stronger.
However, Oliver Wallin, investment director on the Octopus Multi Manager team sounds a note of caution. He believes that the region may have one final lurch down before recovering and investors may get an opportunity to buy in more cheaply: He is looking for markets to fall another 5-10% before reinvesting in the region.
