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China and ASEAN markets offer upside for investors

By: Jack Dominy


Institutional investors are looking beyond short-term issues to see the bigger picture of opportunity in China and the ASEAN countries.

Asia’s growth story is still a strong one despite the challenges of the Covid-19 pandemic, offering institutional investors opportunities in geographies ranging from China to the Association of South East Asian Nations (ASEAN).

Gross domestic product (GDP) is set to grow faster in the emerging markets of Asia than in the developed world. For example, Pictet Asset Management forecasts average annual GDP growth of 4.3% in Asia EM over the next five years, compared with 1.6% for developed markets. Forecasts for certain ASEAN countries are higher still: Vietnam and the Philippines are expected to grow by 5.9% and 5.3% annually, respectively.

China, with its 1.4 billion population, has been drawing the most attention from international investors for a long time. The liberalisation of its investment markets in recent decades has allowed foreign investors to access a range of new and diverse opportunities.

Investment in domestic Chinese shares has been helped by developments such as the launch of Stock Connect in 2014, a cross-boundary investment channel that connects the Shanghai and Hong Kong stock exchanges. This was extended to include Shenzhen’s stock market in 2016, allowing the international investor population in Hong Kong to also access onshore ‘A’ shares. A similar programme for fixed income, Bond Connect, was established in 2017.

Chinese companies account for more than 34% of the MSCI Emerging Markets index, even after a recent pullback. Over the past few years, index providers such as MSCI and FTSE Russell have been adding China A shares to benchmarks, boosting the country’s weighting in many more indices.

In a recent investment update, asset manager BlackRock stated: “China’s economy and capital markets have rapidly grown to become the second largest in the world, yet foreign investors own only a minuscule share of Chinese stocks and bonds. We believe this is a missed opportunity for helping meet investors’ long-term goals.”

China has emerged from the pandemic with renewed confidence, according to BlackRock. It cited data from China’s National Bureau of Statistics and the Ministry of Commerce indicating that economic growth was back in line with long-term trends and foreign direct investment inflows were surging.

Institutional investors said they were increasing their allocations to Asia as a whole over the next 12 months, according to Research in Finance’s comprehensive UK Institutional Market Study. Only 7% of survey participants said they planned to cut their equity allocations to Asia. That compares with 15% planning an increase, with 55% saying their allocation would be unchanged. The sentiment indicator of Asia has risen to a positive score of 0.5, compared with 0 a year ago and -0.2 two years ago.

Those looking for more information on asset allocation trends relating to China, emerging markets and other geographies, as well as other trends, can find out much more in the Research in Finance UK Institutional Market Study, published annually, available here.

ASEAN countries

The Asian investment story goes far beyond China, however. As Research in Finance’s survey indicates, the ASEAN’s 10 member states – including Indonesia, Malaysia, Singapore and Thailand – are also attracting significant attention from global investors.

From an investment perspective, the ASEAN region offers exposure to commodities, tourism, and emerging manufacturing hubs.

Some of the countries, such as Vietnam, are considered frontier markets rather than emerging markets. This brings with it greater risks, as their financial markets are less well developed in terms of liquidity and regulation. However, they can still offer opportunities for investors willing to accept these risks.

Vaccination efforts are gaining momentum across the ASEAN region. Bloomberg reported in August that Singapore has fully vaccinated 80% its population, while the rest of the ASEAN is on track for most of its population to be inoculated by early 2022.

Asian investment bank UOB points to the Regional Comprehensive Economic Partnership (RCEP) as providing the next impetus for growth in ASEAN countries.

RCEP is a trade deal that includes the 10 members of the ASEAN, plus China, Japan, South Korea, Australia, and New Zealand. The members account for nearly a third of the world’s population and 29% of global GDP. The trade grouping is bigger than both the US-Mexico-Canada Agreement and the European Union.

The adoption of harmonised ‘rules of origin’ in the zone will allow ample opportunities for the shifting and diversification of supply chains – which UOB says is particularly important in the wake of the Covid-19 pandemic.

Meanwhile, fund managers at Morgan Stanley Investment Management are finding attractive investment opportunities in the “100 Million Club” group of countries. These are “overlooked” countries with large consumer populations and include Vietnam, Indonesia, and the Philippines.

With strong economic growth prospects and strengthening international links, China and its ASEAN country neighbours are set to attract more attention from global investors.