The latest bout of market nerves hit Far Eastern markets as hard as Western ones. Asia Pacific is booming and there’s no sign of recession, but there are worries all the same.
As the table shows, there’s been a wide variation in the performance of the Far Eastern stock markets. The domestic Chinese market, as measured by the Shanghai Composite Index, has shown truly staggering gains over the past three years. But Australia, Singapore and Taiwan have fallen by 20% in six months and have shown much more modest gains over five years.
So far the Chinese stock market has withstood the nervous selling that has hit other markets. This is mainly because China is still a closed market in capital terms, with foreigners not allowed to buy shares listed on Shanghai and domestic investors not allowed to invest abroad.
Compare my recommended Asia Pacific investment funds
China has further to go in the short-term
The closed nature of the Shanghai market has forced local money into Chinese shares, producing a huge wave of buying. Share valuations are madly high, so that at some point there’s sure to be a crunch. But will this happen before the 2008 Beijing Olympic Games? Most unlikely.
In any case, while it’s true that a lot of Chinese exports still go to the US, regional markets trade more and more with each other (just as countries within the EU do). And with China undertaking an infrastructure investment binge (roads, railways, airports, power stations) that makes its Great Wall look like small beer, there’s no reason to expect a significant slowdown in its economy.
Regional markets in a spin
| Regional stock markets | Six months | One year | Three years | Five years |
| Australia | -17.7% | -9.7% | +34.5% | +78.0% |
| China | +9.6% | +119.0% | +304.2% | +233.1% |
| Hong Kong | -5.5% | +4.7% | +69.9% | +128.9% |
| Singapore | -20.5% | -8.9% | +37.7% | +110.0% |
| Taiwan | -20.9% | -3.2% | +29.5% | +53.3% |
Data to 22/1/208. Source: yahoo.com
The best managers avoid the worst
Our selected Asia Pacific investment funds are regional, and spread their money across several markets, including India and Australia as well as China and its neighbours. That means they haven’t made piles of money out of the Chinese market, but also means they have avoided the 20% fall in several of the larger markets in recent months.
Most funds still have a large indirect holding of China via Hong Kong. New Star Pacific Growth has 39% of its money invested in HK, while most other funds have between 20% and 30% in HK.
Most managers favour South Korea, where holdings range from 10% to 25%, and Taiwan (around 10%). Only two funds have gone a bundle on Australia, Martin Currie (26%) and Lincoln (21%). Martin Currie’s Jason McCay has got most markets right over the past few years so it will be interesting to see how he weathers the recent Australian shakeout.
How our selected Asia Pacific funds have performed
| Current recommendations | Six months | One year | Three years | Five years |
| Aberdeen Asia Pacific fund | -3.1% | +10.1% | +69.3% | +164.2% |
| Lincoln Far East fund | -7.4% | +8.1% | +42.9% | +124.8% |
| Martin Currie Asia Pacific fund | -3.3% | +21.4% | +99.1% | +228.9% |
| New Star Pacific Growth fund | -11.6% | +9.5% | +62.2% | +163.4% |
| Asia Pacific Sector Average | -8.2% | +13.3% | +78.0% | +154.5% |
| New funds | | | | |
| Baillie Gifford Pacific | -8.1% | +24.2% | +109.4% | +188.3% |
| Fidelity SE Asia | -6.5% | +28.5% | +120.7% | +196.7% |
* Including reinvested net income. Data to 22/1/08. Source: Financial Express
One fund I am not happy about is the New Star Pacific Growth fund. Ian Beattie’s fund has continued to trail the sector average over the past six months, so this fund is being removed from our list.
We have added two other funds with good records, Fidelity South East Asia, a £1,200 million giant where Allan Liu has produced good results over the past four years, and Baillie Gifford Pacific, where veteran Gerald Smith has an 18-year track record of staying ahead of the pack.
Go where the growth is
China’s economy is growing by 10% annually and many of its neighbours are seeing growth rates of 6% or three times the rate likely in Europe. That isn’t necessarily going to mean better stock market performance over any short period of time.
But over the longer term it does mean investment managers can find businesses with the potential for faster and more profitable growth than they can in more mature markets. That’s why I recommend that all long-term investors have a stake in the region.
My favourite funds in the sector are the Aberdeen Asia Pacific unit trust and the Martin Currie Asia Pacific unit trust. Aberdeen’s Hugh Young has more than 20 years’ experience and has developed a unique management style.
It doesn’t always produce fireworks, but Young trades amazingly little- he changed only 10% of his shareholdings last year while Fidelity’s Allan Liu switched half of his - and Young probably knows the quality businesses in the region better than anyone.
Martin Currie’s Jason McCay is more active, but runs a more concentrated portfolio- just 48 shareholdings or half as many as Aberdeen. Yet he also has a very widely spread portfolio in terms of countries and industries. As the chart shows, he’s been consistently ahead of his peer group. I’ll be surprised if his fund isn’t among the top performers in the sector over the next few years.
Important risk warning - please read
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.
