RBA upbeat on Asian markets
Strong links to China and relatively low debt levels are among reasons for the Reserve Bank's bullish view on emerging Asia.
Strong links to China and low debt levels relative to other emerging markets are among reasons for the Reserve Bank's bullish view on emerging Asia.
It also points to the region's relative currency stability as a positive attribute, in its most recent monetary policy statement – while noting any further escalation of the US-China trade war could dent their strong performance.
The region's outperformance "partly reflects the region’s stronger economic links to China and robust domestic demand compared with other emerging market economies", according to the RBA.
And while inflation has remained low, "real exchange rates have been broadly consistent with economic fundamentals".
"The risks are greater when investing in emerging nations than developed countries, although returns tend to be greater over time," says Brett Evans, managing director of Atlas Wealth Management.
“Investing in Asia provides investors with a broader selection of companies and sectors, which can have its benefits. However, when you take this approach you not only have to deal with market risk but also currency and sovereignty risk as well,” he says.
Another financial planner, Scott Keely with Wakefield Partners, says more developed markets tend to operate more efficient investment markets: “There will continue to be political and regulatory risk, and perhaps corruption, impacting investment markets in emerging Asia".
Pros and cons of ETFs, managed funds
Keely believes all portfolios should have a small exposure to emerging markets. “It’s not unusual for our portfolios to have 5 per cent to 10 per cent exposure to these sectors,” he says.
“There are now a few emerging-market exchange traded funds available, namely [through] iShares, Van Eck and Vanguard, which provide some exposure to emerging Asian markets, however they are not emerging-Asia specific.
“As they predominantly track emerging-markets indexes, there continues to be significant exposure to China in these investments".
Keely notes several managed funds act in this space, a number of which have much lower exposure to China. "This provides further diversification and enables the investor to target [more precisely],” says Keely.
Evans also likes ETFs for both the broad exposure they can offer to the Asian region and their liquidity.
"During the Asian financial crisis in the late 1990s we saw the importance of investors being able to gain access to their funds and to be able to liquidate holdings should the economic environment deteriorate rapidly," he says.
Conversely, managed funds are more beneficial in providing exposure to markets that are more obscure to self-directed investors. "India is a good example of that; however, access is improving,” says Evans.
As examples of ETFs, he likes the iShares Asia 50 ETF (IAA) - which holds a Morningstar bronze medal rating - and the Vanguard FTSE Asia ex Japan Shares Index ETF (VAE) - which isn't covered by Morningstar.
In managed funds, Evans highlights the Morningstar silver medal-rated Platinum Asia Fund and the UBS IQ MSCI Asia APREX 50 Ethical Fund.
However, an alternative viewpoint comes from Rob Holder, asset allocation specialist with Crestone Wealth Management. He prioritises the importance of active management within emerging markets, given they are "more immature and less efficient".
These attributes can be better-harnessed by professional active managers, Holder says.
In terms of specific sector exposure from emerging Asia, he points to technology along with the region's "very different population dynamic, with many Asian countries experiencing a significant shift towards greater consumerism as wealth increases."
More from Morningstar
• Make better investment decisions with Morningstar Premium | Free 4-week trial
Nicki Bourlioufas is a contributor for Morningstar Australia.
© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.
