“If you are looking to improve return expectations, we see most opportunities in India, Taiwan, Japan and the Philippines. If you are trying to reduce valuation multiples in the portfolio, South Korea and China are undervalued,” she says.
Elsewhere, different countries are emerging as global leaders in specific sectors like cashless payment innovation in China.
At the NZ$77.1 billion New Zealand Superannuation Fund, a passive reference portfolio split 80:20 between equities and bonds guides the Auckland-based sovereign investor’s risk-on approach. A total portfolio strategy eschews any country-level approach apart from an overweight to New Zealand where acting CIO Alex Bacchus counts the largest investments in private forestry and agriculture alongside a sizeable allocation to public markets.
However, NZ Super does run an active return strategy that strategically tilts to take positions at a country and regional level across equities, rates, currency and credit based on the team’s views of long-term fair value.
In Asia, this most recently manifest in an overweight to the Japanese yen (reduced since the yen has strengthened) that was also long Japanese equities. The strategy also played into improved governance amongst Japanese corporates where Bacchus notes regulation is pushing companies to return more money to shareholders.
“We don’t try and forecast what is going to happen in the next few months, but take positions based on our long-term view of valuations,” he says.
Michael Hasenstab, executive vice president and chief investment officer for Templeton Global Macro, also flags currency opportunities in Japan as an example of the region’s diversification. Although he is wary of Japanese fixed income because of potential upward pressure on bond yields, he argues the yen continues to stand out from a structural perspective.
“We expect the Japanese yen to potentially benefit as corporate behaviour and the labor market shift to more productive structures, reflation takes hold, monetary policy normalizes, and reshoring takes advantage of Japan’s strategic and comparative advantages.”
Another example is Thailand’s $34 billion Government Pension Fund which runs an active, top-down investment strategy that also avoids allocating to any specific country. But Man Juttijudata, senior director, strategic and tactical asset allocation who is responsible for GPF’s active investment strategy, says the region’s diversification benefits play an increasingly important role.
For example, he recently parred down the allocation to Thai equity in favour of a wider emerging market allocation.
“We try to reduce our home bias. We first stepped outside Thailand with our allocation to developed markets, but we found we still had a large domestic allocation so allocated more to emerging markets. We only have a very small allocation to Thai equity today.”
Juttijudata adds that GPF is innately comfortable stepping into India or frontier markets like Vietnam and is planning to increase private equity investment in Thailand and the Philippines.
“We are Thai, we are already risky,” he reflects. Still, he is mindful of the challenges in the region, particularly the lack of regulation around infrastructure, and most of GPF’s public and direct real estate and infrastructure investment is either in Europe or Australia.
Attractive income streams
Fixed income provides the same diversification benefits as equity or a particular currency exposure. Australia is a favourite allocation for investment grade sovereign investors on one hand. On the other, those same investors can tap into duration and yield advantages in other countries – albeit with an eye on the oftentimes lack of liquidity and the need for more hedging instruments.
Hasenstab believes that the region’s low debt levels relative to developed markets where debt burdens rose during the pandemic also make a compelling reason to invest. China and India have relatively high fiscal balances, but many other emerging Asian countries have significantly smaller deficits or possibly even surpluses – for example, the IMF projects small fiscal surpluses for Korea from next year.
This provides an opportunity for investors seeking to diversify away from markets where fundamentals may mean more shaky returns for bonds, or where there are concerns about potential supply of bonds into the markets because of large deficits, he says.
On a cautionary note, NZ Super’s Bacchus warns that economies in APAC are not immune from developed market sovereign debt and the global debt imbalance.
“Many of these countries are tied to the US dollar, and debt levels in the West can influence what happens in Asia,” he says. “It hasn’t been an issue yet, but at some point it might be.”
GDP, growth and trade
Perhaps the other standout reason to invest in APAC is the region’s growth. Although Chinese growth remains challenged, Australia, South Korea and Indonesia have demonstrated consistently high growth rates whilst countries including Singapore, Philippines and India stand out for their high variability in GDP growth.
The region is significantly more vibrant than the mature western economies, argues Hasenstab who points to IMF expectations that Asian growth will hit 5.0 per cent in 2025 compared to 2.2 per cent for the US and 1.2 per cent for the EU.
Positively, NZ Super’s Bacchus also observes the pickup in Indian growth versus China, noting how emerging market indices have now rebalanced with more exposure to India than China.
“Equity returns in China have been low compared to India which is doing amazingly well.”
Index investors are mindful of the fact APAC has a reasonably small market cap relative to its GDP, potentially limiting opportunities. However, Bacchus counters a GDP-weighted portfolio approach can face issues relating to access and liquidity, and that globalization means economies and countries will always interact to some extent.
Tan says the region’s “healthy” consumption levels make APAC economies less reliant on exports for growth. And APAC is also benefiting from reshoring and friendshoring strategies, as well as “China plus one” where some supply risk is diversified away from China. Hasenstab argues the integration of supply chains leads to greater exports, but also “drives fixed investments in facilities as well.”
He cites Malaysia as an example of being well positioned to benefit from reshoring trends in another nod to the region’s extraordinary variety. “Malaysia is marketing itself as a neutral player geopolitically, hoping to continue to attract investment both from China and from the western-aligned bloc,” he concludes.
