Markets in Emerging Asia showing Eastern promise for UK investors
EMERGING markets will, so the optimistic growth story goes, lead the rest of the world out of recession. They sprang back from the Asian crisis of 2007-8, the dot com crash of 2001 and are now, if quarterly GDP data and stock market indices are anything to go by, doing the same again.
Asian tigers such as Malaysia, South Korea and Thailand have all seen quarter-on-quarter positive growth rates. Singapore leads the pack with an astonishing 20.7 per cent growth in the same period. The MSCI Emerging Market Asia index has rallied 56.22 per cent year-to-date and 16.13 per cent over the past three months. In contrast, the MSCI Europe has risen only 26.90 per cent since the start of the year while the MSCI’s G7 index has risen by 19.35 per cent since January and 15.2 per cent over the past quarter. And MSCI Barra’s research analysts forecast that emerging market equities have much more potential if controls on capital markets are relaxed further in the future.
Traditionally, investors have perceived investing in emerging markets as a high reward but high-risk strategy. However, the financial crisis has made it clear that developed market equities are far from safe investments and with Asia expected to lead the recovery, canny investors and traders are keeping their exposure to the region.
Although recent worries about a Chinese asset bubble have shaken confidence in the region, 40 per cent of fund managers surveyed in September by Bank of America-Merrill Lynch remain overweight on emerging markets, although this is less than last month’s 52 per cent.
It should be noted, however, that according to this survey global emerging market investors have shifted to underweight on China for the first time since August 2008, although Asia-Pacific investors maintain their overweight position.
Private London-based investors have a number of methods of taking advantage of the growth story of emerging Asia, such as funds, exchange-traded funds (ETFs) and covered warrants. These products tend to track regional indices, which give you automatic portfolio diversification and don’t expose you to one particular stock, or indeed country – a risky bet whatever you are trading.
The majority of investment managers offer funds tracking emerging Asia indices. Ashmore Investment Management focuses solely on emerging markets and has a number of investment funds which focus on four specific areas: external debt, local currency, special situations such as corporate restructuring, corporate high-yield and equity as well as a multi strategy fund which invests across all of the above investment themes.
Ashmore’s head of research, Jerome Booth, says that the massive infrastructure programmes being implemented in emerging markets are a big opportunity for private equity, and the really big returns are going to come pre-IPO. Investors wanting exposure to these returns could look at Ashmore’s special situations fund.
Booth also says that he is bullish at the moment on corporate high yield and on dollar-denominated sovereign debt. However, he expects local currency to take off in the next six months thanks to building inflation pressures in the emerging economies.
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However, investing in emerging Asia through investment funds can be expensive as you have to pay management fees without the guarantee of a better return. Investors looking for a better value and more transparent approach – although one that admittedly requires closer attention – could look at exchange-traded funds (ETFs). As they are listed and traded on an exchange, their pricing is more transparent and you can sell your ETF positions back to the market if you become uncomfortable with your exposure or want to cut your losses.
All the major ETF providers such as iShares, ETF Securities and Powershares offer ETFs based on underlying emerging market indices. For example, the iShares ETF tracks the MSCI Far East ex-Japan, which year-to-date has grown 45.5 per cent.
In terms of using covered warrants to access emerging markets in Asia, both of the two biggest providers – Societe Generale and RBS – offer covered warrants with the Hang Seng China Enterprises Index as the underlying index. These are ideal for investors with a specific view about the future for the Chinese stock market as you can take a view on where the index will end up over a variety of time frames.
Alternatively, Goldman Sachs offers a warrant on a basket of emerging markets FX, which includes the Indian rupee, the South Korean won, the Malaysian ringgit, the Philippine peso, the Singapore dollar and the Taiwanese dollar.
Investing in the markets of emerging economies can offer both traders and investors an ideal opportunity to capitalise on these countries’ faster rates of growth and at this point, potentially earn greater returns than developed market equities.