Darius McDermott: Why the role of Asia has to change in investor portfolios

The region now accounts for 80% of the emerging markets equity universe. But for many investors it has always been pigeonholed as the satellite element of their portfolios, either as a growth kicker or a diversifier.

I believe it's only a matter of time before Asia becomes a core holding for a majority of both growth and income investors and the numbers to support this - both on a demographic and business front - are staggering.

Asia now accounts for 59% of the world's population (Europe accounts for 9.7%) and it is home to almost 18,000 listed stocks - that's more than the US, Europe and the UK combined, according to data from Fidelity. And this year, the region is expected to overtake the GDP of the rest of the world combined - it accounted for only 30% in 2000.

The fact that the Asia Pacific region will be responsible for 88% of new members to the middle-class by 2030, says the European Commission, it also puts it at the forefront of global growth.

Despite the impact of the pandemic, the International Monetary Fund says emerging and developing Asia will grow by 1% in 2020, compared to a contraction of 6.1% in advanced economies. Asia is then expected to grow by 8.5% in 2021 (vs. 4.5% for advanced economies). Even in period of crisis, the growth story only gets stronger.

China is the epicentre of all things Asia, as it establishes itself as the heir apparent to the US as the world's largest economy. It's economic and political influence now extends through central Asia across the world. It's also been aided by specialist policies, such as ‘one belt, one road' and the liberalisation of its financial markets.

The decision by the MSCI to increase its weighting and breadth of China A-shares exposure in its emerging markets index, as well as its China index and other regional indices also represents a significant opportunity.

India is likely to see a multi-decade low in terms of growth this year (in April the IMF predicted 1.9% in 2020 down from 5.8% in January due to the recession). However, it is expected to grow by 7.4% in 2021 and has made numerous strides under Prime Minister Narendra Modi since 2014.

It's also another country looking to take advantage of trade wars by offering new manufacturing companies a tax cut from 25% to 15%. India is also opening up more to investors with the 2019 Budget announcing the Securities and Exchange Board of India is planning to increase minimum listed shareholdings in companies from 25% to 35%.

Wealth creation across Asia is also giving rise to innovation - such as the regions' own brands, intellectual property and market structures. This has seen a spike not only in healthcare and technology investing, but also in the way countries initiate reform programmes.

Those looking for growth might consider the Matthews Pacific Tiger fund, Manager Sharat Shroff believes that the best opportunities for wealth creation arise when market reforms, enhanced competition and rising household incomes combine to spur new and growing markets.

Another option is the T. Rowe Price Asia Opportunities Equity fund. Manager Eric Moffett invests across Asia ex-Japan in a concentrated portfolio of high-quality companies. These companies tend to be established, with leading market positions and good management teams who prioritise shareholder returns. He also has a ‘safety first' approach which has served well in recent markets.

Investors may also look to this region for income diversification in the future. Often overlooked, it actually has a higher yield than many other regions in the world. An option here would be the Schroder Asian Income fund, managed by Richard Sennitt, with the help of Schroders' vast team in the region. It has a current dividend yield of 4.7%.

Darius McDermott is managing director of FundCalibre

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