Will this be the decade that Asia leaves the US in the dust?

Funds and trusts backing fast-growing economies have been tipped to outperform those investing in the US over the next decade.   

The decade behind us was dominated by phenomenal growth in the US stock market, returning almost 300%, more than twice that of Asian markets.

But which market will be the shining star in the decade ahead? There are four key reasons why Asia could turn out to be the market to beat, argues Darius McDermott, managing director of FundCalibre.

Four reasons to back Asia

First, crises tend to lead to secular shifts in outperformance, for example, the dotcom boom in 2000 marked the end of US growth momentum and the pendulum swung back towards value, emerging markets and European stocks. After the global financial crisis, US and growth stocks took the lead once more. “There could be a similar shift today, as North Asia leads the world out of the pandemic,” McDermott suggests.

Another big driver could be the pace of urbanisation and the continuing growth of the middle classes, which will “create large domestic and consumer-led markets”. Inter-regional trade from a new free trade agreement that covers 10 ASEAN countries should also support future growth. And, finally, a wide divergence of valuations mean there are attractively priced opportunities to be found, despite the existence of some ‘froth’ in certain trendy sectors such as electric cars, tech and biotech, adds McDermott.

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Asia gains prominence

There will be further evidence that over the next 10 years, China will assume the number one position globally in economic, financial and political affairs as its sphere of influence grows, argues Tom Becket, chief investment officer at Punter Southall Wealth. “When it comes to investment opportunities, it’s slightly more nuanced,” he says. “You need to look at it as trying to benefit from the growth of Asia, and particularly the Asian consumer theme, where you’re about to see Chinese retail sales overtake those of the US, which is an extraordinary statement by comparison to where we were a decade or two ago.”

Becket suggests that investors can play this theme by investing directly in Asian equities, but also indirectly by buying those companies in the West that are successfully selling their goods and services into Asia.

“I expect the developed world, including the US, to shrink back down towards the growth trends we saw in the previous decade.” Asia, meanwhile, will continue to gain relevance for investors, he says, noting that South Korea, Taiwan and China together now make up 65% of one emerging market index, which will mean investment in the region keeps growing.  

Period of dominance ends

Ben Yearsley, director at Shore Financial Planning, agrees a changing of the guard could be on the cards longer term. “I do think Asian markets are well set for a prolonged period of outperformance,” he says. “Better handling of Covid-19, lower debt levels, good demographics, and some world-leading companies make for an exciting combination. Obviously, the path won’t be smooth, but after a long period of dominance by the US and their tech leaders, is it time for a market shift?”

Janus Henderson’s head of multi-asset Paul O’Connor says he is more convinced that the US’s position of dominance will wane but less sure that Asia will take its place. He notes that what has been “very striking” is the sustained outperformance of US stocks against every other market, whether Japan, China, the UK or Europe. But now things could be about to change. “A number of factors we look at would suggest we’re entering a period where a lot of the drivers of US outperformance are now looking fatigued,” says O’Connor.

Asia is not a homogeneous market

The US market delivered yet again last year, but the actual drivers of that were just a handful of stocks – namely the FAANGs (Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOGL)), and now stronger earnings growth is expected outside the US, especially if President Joe Biden brings in tougher regulation and higher taxes.

Asia has attractive characteristics, notes O’Connor, but it is not a homogeneous market and should not be treated as such – buying China, for example, “is much less a discussion about the relative merits of the Chinese economy than it used to be, and much more about what you think of Alibaba (NYSE:BABA) and Tencent (SEHK:700) and whatever rich multiple they’re on,” he says. So, while there are opportunities in Asia, investors may need to be selective.

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“There’s defensiveness in Japan, there’s cyclicality in Korea, there’s secular growth in India. We find plenty of different stories within Asia that we do like, and certainly that we would back on a relatively long horizon for outperforming the US,” adds O’Connor.

Funds to access Asian growth

For investors wanting to back the Asian theme in portfolios, FundCalibre highlights Invesco Asian, JPM Asia Growth, Ninety One Asia Pacific Franchise and Stewart Investors Asia Pacific Leaders Sustainability as funds worth considering. Becket highlights Matthews Asia ex Japan Dividend and Mirae Asset China Growth Equity.

Asia choices in interactive investor’s Super 60 are: Fidelity China Special Situations (LSE:FCSS), Fidelity Asia, Guinness Asian Equity Income and iShares Pacific ex Japan Equity Index.

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