In the last two decades, Asia has become a powerhouse of global growth. Demographics and digitalisation are fuelling a boom economy that’s expected to continue for decades to come. However, this complex and dynamic collection of markets also brings the challenges and opportunities of volatility. An active allocation to Asian equities offers the potential to harness this growth and seek resilient, risk-adjusted returns as the growth story of this region unfolds.

How demographics and technology are driving growth

With more and more people being lifted out of poverty, income levels across Asia are also increasing. This rise in the middle-class population is expected to drive significant demand for goods and services in the region during the next three decades.

As a region at the forefront of the technology industry, the digital revolution has brought even greater momentum to Asian economies. In the last 20 years, technology innovation has accounted for nearly a third of Asia’s per capita growth. For investors, the Asian technology sector can be an excellent way to capture returns coming from growth in consumption. It can also work well as a defensive portfolio allocation at a time when wider global equities markets appear to be reaching their peak.

Asian middle-class spending is trending far ahead of other regions

Spending by Asian middle-class is forecasted to top US$35 trillion by 2030.

Source: The Brookings Institution, The Unprecedented Expansion of the Global Middle Class, 2017.

Are investors missing out on Asia?

In spite of the strong economic and demographic trends we’re seeing in this region, Asian companies are underrepresented in global equity indices. In the MSCI AW Index, for example, Asian stocks make up just 10.2% of the index. When you consider that indices like this are used as benchmarks, many investors can expect to be underweight in their allocation to Asian equities.

The Asian investment universe

In the last 20 years, we’ve seen a dramatic shift towards emerging economies in the Asian region. China and South Korea have taken over the top two slots in the MSCI AC Asia ex Japan index. These two countries now make up more than half the index, compared with a modest 5% share back in 19985.

An ever-changing economic landscape

At the stock and sector level, we’ve also seen the rise of emerging economies, with Chinese internet giants Baidu, Alibaba and Tencent snapping at the heels of their FAANG (Facebook, Apple, Alphabet, Netflix, Google) counterparts in the US. But these large cap players are just a part of the tech enterprise movement in Asia. There has been a recent surge in new digital businesses that don’t yet feature in broad market indices. Investors looking to capitalise on tech innovation and growth in the region need to look beyond established stocks and indices.

Four of the MSCI AC Asia ex Japan top 10 holdings come from the financial sector, which speaks to the importance of this industry in the Asian growth story. With only one developed country (Hong Kong) currently represented in the top 10, we see a region continuing to evolve as a diverse collection of economies and industries with much to offer investors.

While this view may present investors with potential for higher growth, volatility in the region can be expected to continue. Greater diversification and strong fundamentals in selected stocks are essential to positioning portfolios to ride out ups and downs in the region, and the global economy overall.

MSCI AC Asia ex Japan Index top 10

 

Source: MSCI AC Asia ex Japan index, top 10 companies as at 28 June

The active advantage for risk and return

The Fidelity Asia Fund holds a concentrated high conviction portfolio of 20-35 companies across Asia. Portfolio Manager Anthony Srom is backed by a 400 strong team of investment professionals worldwide. Together they explore the whole Asian equities universe to find the best ideas to include in the Fund.

As well as applying disciplined analysis to picking these best ideas, the portfolio is carefully weighted for diversification across countries, sectors and companies. This further supports our goal of delivering sustained returns and managing downside risk for investors.

Recommended as a long-term holding, we aim to outperform the benchmark over a five to seven-year timeframe.

Past performance is not a reliable indicator of future performance.  Prior to making an investment decision, retail investors should seek advice from their financial adviser. Investors should also obtain and consider the Product Disclosure Statements (“PDS”) for the fund(s) mentioned before making any decision about whether to acquire the product. The PDS is available on www.fidelity.com.au