With China’s economic growth slowing and the seemingly negative ripple effect on the rest of Asia and in emerging markets, it’s easy to think about keeping the Asia region out of your investment portfolio.
But that would be a mistake. While China is a behemoth in the region, it’s myopic to think that what’s happening to China is mirrored everywhere else in the area. A lot of Asian countries are doing just fine, even as China’s growth slows.
“When you think about emerging markets, the first thing that comes to mind [is] China. But emerging markets have become a lot more selective. [It’s] a lot more of an individual growth story to pay attention to,” says Nick Niziolek, portfolio manager of the Calamos Evolving World Growth Fund (ticker: CNWGX), based in Naperville, Illinois.
Vito Sciaraffia, co-chief investment officer at Texas-based Innealta Capital, has analyzed the impact of China on specific economies in Asia in the past five years. His research shows China’s influence on most Asian countries is low. The market most closely correlated with Beijing’s markets, meaning its returns are most similar to China, is Hong Kong. “The correlation is around 85 percent, meaning that for every 1 percent China goes up, Hong Kong goes up 0.85 percent,” Sciaraffia says.
That’s similar to the correlation some European markets have with each other, such as Belgium and France.
Yet other Asian countries have much lower correlation with China’s markets. Indonesia’s correlation is only 50 percent, the Philippines is 45 percent and Japan is 35 percent.
Keep a balanced portfolio of emerging markets. A lot of Asia or emerging-growth focused funds have a high exposure to China, which is pinching returns this year. Being wary about having a heavy weighting in one country makes sense, says William Hoyt, managing director at Lattice Strategies, a San Francisco firm with two exchange-traded funds focused on emerging markets and developed markets: Lattice Emerging Markets Strategy (ROAM) and Lattice Developed Markets (ex-US) Strategy (RODM).
“It’s not just China-specific. It applies to any country,” he says.
Andrey Kutuzov, associate portfolio manager of Utah-based Wasatch Emerging Markets Small Cap Fund, says Asian countries that don’t depend on commodity exports and countries with large domestic markets tend to do quite well independent of China, with India being the best example.
Kevin Carter, founder of San Francisco-based Emerging Markets Internet & Ecommerce ETF (EMQQ), says outside of China, India is the biggest emerging market in Asia. India is sometimes not included in views about Asian markets, even though it’s geographically part of the continent.
“India is the fastest-growing economy now, having basically a higher growth rate this year than China,” he says.
Kutuzov says India holds the heaviest weight in the fund’s portfolio, noting it has “a massive domestic economy.”
There are several reasons to like India. “It is a fairly stable democracy, there’s real rule of law in India, most of it is privately owned … That’s important; it creates economic visibility in India,” Kutuzov says.
Niziolek says his team also likes India’s story, as well as the growth stories in Vietnam and the Philippines. His fund has exposure to markets in these regions. Both the Philippines and Vietnam have favorable growth demographics where the labor force growth rate is likely to outpace the population growth rate for many years.
In the Philippines, there’s been significant growth in gross domestic product and GDP per capita. “Right now, 21 percent of the population makes more than $5,000 per capita, where in 2005 it was closer to 6 percent, so there’s been a big ramp-up in wealth,” Niziolek says.
Vietnam has a low-cost, low-wage economy, with a lower unit cost of labor than China.
“They are likely one of the beneficiaries of this whole Trans-Pacific Partnership trade deal that was just agreed to; we’ll get more details on that. They should benefit from the freer trade between the U.S. [and other nations],” Niziolek says.
How to invest in Asia. There are different ways to invest in Asian companies, Sciaraffia says, as many firms in Asia are listed on U.S. exchanges. He adds that some of the well-known Asian equity names like Toyota Motor Corp (TM) are so big that their shares behave more like multinational stocks. “Toyota is a well-established firm. They may have their headquarters in Asia, but they’re so large their revenue base is worldwide, rather than representing the Asian economy,” he says.
The easiest way for U.S. retail investors who want to get access to Asian markets is to use mutual funds or ETFs.
There are several ETFs that narrowly focus on the Philippines and Vietnam, for instance, including iShares MSCI Philippines (EPHE) and Market Vectors Vietnam (VNM). Because India is one of the most developed emerging markets, there are several mutual funds and ETFs that focus on the country, including WisdomTree India Earnings (EPI).
Hoyt says many people forget there are ways to play Asia’s developed markets, too.
“It’s interesting — the one country people seem to forget exist is Japan, which is a comparable size,” he says, adding that Japan is one of their preferred countries.
Several Japan-focused ETFs have performed well this year, including the iShares MSCI Japan ETF (EWJ), which is up about 13 percent this year.
“Some people even forget to consider Hong Kong and Singapore, which can be good opportunities,” he says.
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How to Invest in Asia While Avoiding China originally appeared on usnews.com
