Nov 29

Investing in Asia…a wild ride irrespective of its economy

I just did an interview with Money Magazine about investing in Asia and I have to admit that it is one of the most popular requests I’ve had in recent years from advisers and/or their clients. The main reason for the request is that investors want exposure to the strong Asian economic growth story (which is really on the back of China) via their sharemarkets.

The following chart shows performance of Asia (I’ve put 2 indices – S&P and MSCI) vs Australia (MSCI) vs US (MSCI) over the last 5 years which is one of the worst periods for the US ever. The obvious observation from this chart as that there is little performance difference at all between all three regions and the US has outperformed Australia (and one of the MSCI Asian index).

Source: Morningstar Direct

For mine, if you want to invest in the sharemarket to access that particular region’s economic growth you better have a very long timeframe…I believe at least 10 years. Why? There are many reasons but short term there is little correlation between economic growth and sharemarket performance…longer term not necessarily the case…and…I’m also fairly confident that the companies listed on the sharemarket are not necessarily the ones who are benefiting from the economic growth…it is the smaller companies who possible aren’t even listed yet.

So if you are thinking about investing in Asia, I believe there are a couple of key points to consider…

  • Ensure your investment timeframe is long…ideally more than 10 years. Volatility of Asian markets can be very high for long periods of time.
  • Diversify, diversify, diversify…this is easiest done via managed funds or ETFs…and its probably the only way to gain exposure anyway…and don’t make Asia your only bet unless you are prepared to lose money
  • Don’t expected Asian markets to perform that differently from others…the above chart shows how highly correlated sharemarket are despite their different economic characteristics
  • Many Asian countries have fairly high inflation and interest rates, (such as Vietnma, Indonesia and India), and Asian markets are dominated by two major sectors…Financials (like Australia) and Technology (unlike Australia). These factors along with their expected economic growth on the back of a growing China should make for an interesting ride.

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