Investing in Asian Markets
Emerging no more
It’s that time of the week again folks, hello! We hope you found last week’s discussion about the U.S. market useful… but check it out on the blog if you need a refresher.
Continuing with our “global” theme, this week we’re going to focus on Asia. There’s obviously a lot going on and many different stories depending on where you look (China, India, Japan, S.E. Asia) so we might do a longer series on each specific country later - let us know if that’s of interest. For now, we’ll try to think big picture.
The Economic Cycle
This probably goes without saying, but different stock markets in Asia are at very different stages in their life cycle. In the purest form of a stock exchange, growth (i.e. successful companies) should reflect in market performance. However, that relationship is not always straightforward in the developing world.
A healthy stock market depends on a wide swathe of companies going “public” and listing themselves on the exchange. We are seeing that starting to happen in China, but places such as Vietnam and Myanmar still only have a handful of listed companies - which means their stock markets are not necessarily capturing what is going on in the broader economy. You might be better off investing in property or private enterprises in these countries for the time being, until they mature further.
What about developed Asia? Economies like Japan, Singapore and Hong Kong look a lot more like the U.S., with their long history of stock market trading and broad scope of companies you can invest in. They also tend to be more open than their developing market brothers and sisters, meaning you can invest in them from overseas without jumping through too many hoops.
That leaves the two big dogs, India and China. They lie somewhere along the two ends of the spectrum we mentioned above. Both countries have tons of public firms you can invest in and well-established stock markets, but neither make it easy to invest in as an outsider. More on that below.
What’s the Outlook for Asia?
We love the big questions around here! Given the complexity of the region and possible long-lasting implications of Covid, it’s hard to answer this definitively. However, even the most conservative analysts will agree that Asia still has a lot of growth ahead of it. With billions of Asian consumers only just beginning to exercise their spending power, companies across the region should be poised for a gold rush.
But if it’s that simple, why don’t Asian markets rule the world?
This goes back to our earlier discussion about the level of integration between the stock market and the broader economy. Asia’s growth should hopefully be reflected in its markets in the long-term, but short-term economic success might not necessarily flow through to market performance (the way it does in the U.S.) because those links in the developing world are not as clear-cut.
There is also the question of the makeup of market participants. For example, the American, European and Japanese markets are mature, mainly consisting of long-term holders of stocks such as pension funds and mutual funds. In contrast, many newer stock markets - particularly China’s - comprise of individual investors who tend to think more short-term. That means that a) news events do not always result in a proportionate market reaction and b) there tends to be a lot of price volatility.
For context, China’s stock market is trading below where it was in 2007, even though the Chinese economy is significantly larger today.
So despite the overall positive outlook for Asia, things are not as straightforward if we’re talking purely in investment terms. While there’s likely to be gold at the end of the rainbow, it will take patience to get there.
OK, What Should I Invest In?
As you’ve likely gathered by now, no two stock markets are the same. So this question is going to have different answers depending on where you look.
When it comes to developed Asia (Japan, Singapore, Hong Kong, Australia, Taiwan), investing is easy and painless. As long as you convert your cash to JP¥, most brokers make it easy enough to buy all the Toyota or Nintendo shares your heart desires. In terms of what to invest in, our principles always remain the same! Focus on growth, dividends and the long-term outlook - oh and remember, ETFs are your friend.
Our investing principles are not so different for developing Asia, but accessing these markets is more complicated. While some South East Asian markets such as Indonesia, Malaysia and the Philippines are fairly mature, not all brokers offer trading in these stocks. You’ll have to do some extra research before you move forward.
That leaves India and China. Globalization and the digital age has meant that growth in these countries looks very different to what it looked like in the West many decades ago - which makes the opportunities different as well. E-commerce platforms sit side by side with paint and biscuit manufacturers as the fastest-growing companies in these markets.
Logistically, your best bet to access Indian and Chinese stocks from overseas is to go via their secondary listings in developed markets, whether in the U.S., UK or Hong Kong. Tons of Chinese and Indian firms are listed in the U.S., while a majority of Chinese state-owned banks and oil companies trade in Hong Kong. Using a different jurisdiction to trade these markets eliminates all the paperwork you’d ordinarily have to fill out to gain access - genius!
Phew, that’s a lot to take in! There are so many nuances for each country that we could spend weeks talking about them, but hopefully you have a slightly better understanding of Asian markets now… and how to approach investing in them.
Next time, we’ll fly over to the continent to take a look at Europe and some of the most developed economies out there. Is there still steam left in the old man or should you look to greener pastures? Stay tuned.
Interesting !