How to Utilise Asia’s Performance in Your Portfolio
To see all the pictures, tables, and portfolios please use this link to my website: How to Utilise Asia’s Performance in Your Portfolio — iFE — Investments for Expats
It is, without doubt, Asia’s economic time in the 21st century. The world has witnessed in the latter half 20th century and the beginning of the 21st century some of the fastest growth in human history, some of the larger shifts toward urbanization, and more people lifted out of poverty in a brief period of time within any other period in history across this fascinating continent.
Countries such as China had a record 770 million personnel lifted out of poverty (source green network) in the last 40 years to name one of many staggering statistics of the Chinese economic miracle in the last few decades.
Figure 1: Trading Economics- Showing the GDP growth in China over the last 31 years.
For a clear example of China’s growth in the last 40 years look no further than the city of Shenzhen which is symbolic of Chinese economic growth and expansion. A once small fishing village next to Hong Kong. Now, it is known as the electronic capital of the world, rivaling Silicon Valley on startups, and presently has a larger GDP than its city neighbor, Hong Kong.
Figure 2: Shenzhen 1985–2015 CCGN (top) Nikkei Asia Shenzhen at night (bottom)
China has shown to be an economic miracle of the 21st century so far. Like Japan before the 1980s. It’s shown to have constantly double-digit GDP growth throughout 2 decades.
While China has shown itself to be an economic miracle and now a global superpower it is only one of the emerging markets in Asia.
With geopolitical tensions combined with an aging and declining population, could we be in the presence of other large-scale growth stories over the next few decades outside of China? If so, where?
This article will take a deep dive into some of the major Asian economies that are positioned for growth and then look at specific top-performing ETFs, funds, or investment ideas that have exposure to these religions. To give you ideas to aid your portfolio for diversification from developed market equities.
Just a quick note and disclaimer: Investing in emerging markets such as the ones listed below comes with larger political and regulatory risks. Additionally, investing in emerging markets, such as the ones listed below are historically more volatile than developed markets. Therefore, should only be done as a portion of your portfolio if only your risk tolerance is suitable. And nothing in this article is specific investment advice.
What are my top countries in Asia that I would want to have exposure to right now? (I have some exposure to some of these, but not all).
India
From an economic perspective, nothing has looked more favorable than it does now towards India’s economy.
However, “The time is now for India”, has been spoken about for the last 20 years and has failed to live up to expectations (much like Brazil). But could this time be (finally) different?
Looking at the glass-half-empty perspective, it still has large political challenges, and large infrastructure obstacles to overcome, and democracy with a population of 1.4 billion that is still at a very low GDP per capita of $2,400 (source focus economics 2022) is not by any means a guaranteed growth story as still has many substantial challenges ahead. However, it has a young population (average age of 26) large English-speaking population, and a well-educated population (especially at the top end in aspects such as technology). With more companies looking for diversification from China. India seems to be an obvious choice for many due to these plus other factors. Apple recently moved large parts of its supply chain to India.
So why could it be Indians’ time to grow?
Other than the reasons listed above. Ask yourself how many Indians are dominating industries and economies. Look at how many Indian citizens (or former Indian citizens) are heads of mega tech companies and large U.S companies:
Microsoft, Google, Adobe, Starbucks, Twitter, IBM, FedEx (to name a few)
All have or had Indian CEOs. This is astonishing to think that these are companies that are currently shaping the world will live in today.
Figure 3: Sundar Pichai- CEO of one of the largest companies on the planet Alphabet (Google)
Now, yes in economics this is referred to as a brain drain where some of the smartest citizens go to other rich countries and mostly contribute to the host nations rather than the home country in the forms of taxation and spending.
But what if most Indians that are some of the smartest, most talented, and well-paid in the world in their respective fields decided to stay in India for reasons such as seeing more opportunities and a booming economy?
This is what is happening based on a few surveys.
This could be a boost for India’s economy and innovation over the long term.
Personally, I have at least a dozen Indian clients that have re-patriated back from high-paying jobs on the west coast of the U.S. back to India.
Yes, this is a small percentage of the top end of the workforce. Yet the economic fundamentals are true if more Indians are staying in India, or returning, it could have an overall positive impact on the Indian economy.
India is also starting from a very low base. If you look back to 1990 China and India were around the same GDP per capita. However, in the last 30 years, China has had significant growth while India has had somewhat modest growth.
India, therefore, has a long way to catch up.
Figure 4: China and India’s growth per capita and exports from 1962–2018 (source MINT)
Personally, similar to most I don’t think that India will see an economic boom as China saw in the late 1990 and 2000s, but it doesn’t need to!
Even a modest growth rate of 6%-6.5% is very achievable and is predicted by the Asian development bank over the next 20 years. This will mean that India could become one of the largest economies in the world and have a GDP per capita of around $10,000.
https://www.adb.org/news/india-economy-grow-6-4-fy2023-rise-6-7-fy2024
From an economic standpoint, the rationale is clearly there to invest in India with it potentially increasing its GDP per capita by 400% in the next 2 decades. You could look to go in most sectors and expect growth over the long term (20 years) however, this is not guaranteed.
Figure 5: Source EY
The bad news for investors is that the market seems to have priced this in and is not cheap to invest in India.
For this reason, I see it as more of a selective market. Unless you are well versed in Indian equities and economy I would highly recommend not selecting individual stocks due to risk.
Therefore, I have looked to find the three best funds that I personally like in India for exposure for portfolios (sources are from Morningstar data from 19/06/2023):
Fidelity India focus fund
https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F000010CDM
Goldman Sachs India Equity Portfolio
Schroder International Selection Fund Indian Equity
Investment for expats Sensex Option Note Creation:
What we are making for clients is an alternative option that offers 100% protection with 100% upside over a 3-year period over the Sensex. As I’ve said before it’s a high P/E ratio, so this has been requested by a few clients. If you would want to look at these in any of your portfolios, please email me using the button at the bottom of the page or the contact us page.
China
China has seen its economic problems expand in 2023 and the markets have priced this in.
Figure 6: Hang Seng Index YTD June 19, 2023 (source Google Finance)
With misleading economic growth indicators to rising youth unemployment, 2023 has not been the rebound China would have wanted to see post-COVID.
However, as I have written in a few previous articles China can potentially overcome these issues. Recently I have seen China cut interest rates going against what the rest of the world is doing. This is to help boost growth. I see this as a positive that China knows its need to enforce growth back into its economy after COVID-19 and will look at the necessary implementations to do so.
In previous blogs and emails, I have written about how China is now going from a manufacturing nation to an innovative one. I give the example of how many high-end computers from China are manufactured or cars that are replacing Japanese models in Southeast Asia.
These long-term shifts along with other factors could allow China to prevail over the long term and keep to its predicted growth targets.
However, the markets seem to be less optimistic and this depends on what side of the fence you are sitting on. It is either a great opportunity to get into the Chinese index/markets (Hang Seng or CSI 300) or a region to leave alone as it has too many risks associated with it.
I am in the camp of opportunity. Although, I do acknowledge that anyone investing in China comes with large regulatory, and political risks which was evident in the Chinese large-cap tech crackdown of 2021 where the private education sector ban of the 2021 Luckin coffee scandal.
So, I have created a portfolio looking to capture some of the areas of Chinese growth.
China Growth Portfolio Breakdown
This aims to take advantage of growth markets in China at the forefront of innovation and growing consumer supply, technology innovation, and healthcare sectors.
Risk level — 9 out of 10.
Type of Investor — High-risk tolerance with a long-term view that can take a high level of volatility. If you choose to invest, this capital must be capital that you don’t rely upon.
Time frame — 5 years plus, ideally 10 years or more.
How to use this — As part of a China-based portfolio as an alternative over an overall portfolio.
We have aimed to screen a number of ETFs that are large and well-established ETF companies with a minimum of $200 Million in AUM invested and liquid.
Fund Name Weight Cost Link (Portfolio on the website)
iShares MSCI China ETF 25% 0.57% https://www.ishares.com/us/products/239619/ishares-msci-china-etf
Krane Shares CSI China Internet ETF 15% 0.69% https://kraneshares.com/kweb/
Global X MSCI China Consumer Discretionary ETF 21% 0.65% https://www.globalxetfs.com/funds/chiq/
Invesco China Technology ETF 12% 0.7% https://www.invesco.com/us/financial-products/etfs/product-detail?audienceType=Investor&ticker=CQQQ
MSCI China Healthcare ETF 12% 0.6% https://www.globalxetfs.com/funds/chih/
iShares MSCI China A 15% 0.6% https://www.ishares.com/us/products/273318/ishares-msci-china-a-etf
Consumer Growth in China
Over 40 years China has transferred its economy to become the second and is predicted to come first in the next 10 years by some forecasts as of 2023, the biggest economy in the world by GDP. Although, this has largely been due to a manufacturing and export-based economy.
China, however, is no longer a cheap labor location, and with added tension from the trade war, we have seen manufacturing move to different regions due to political and supply chain issues. China aims to shift in the next chapter of its growth being automation, technology, and consumer discretionary. These sectors are aided by national strategic policies.
China has undergone a transformation to a consumer base economy but is still behind the OECD countries’ average on consumer spending. Giving reasoning to believe there is growth in the sector.
One of President Xi’s plans which was presented at the November 2022 CCP party conference was to reduce the income difference in wealth and aid common prosperity.
https://www.cnbc.com/2021/08/18/chinas-xi-emphasizes-common-prosperity-at-finance-economy-meeting.html
https://www.ceicdata.com/en/indicator/china/monthly-earnings
With an average income around half of what is in most developed countries and an annual growth predicted at 6% over the next forthcoming years (source Focus Economics). Chinese consumer spending is likely to be getting closer to the average OECD countries’ consumption of 73% (Source world bank) which presently stands at just over 50%.
If we look back at the history of wages in China. Inflation-adjusted income in China from 2019 over the previous 10 years grow 7.9% compared to 1.9% in the US. In 2022, the middle class in China is larger than the population of the U.S.
https://tradingeconomics.com/china/wages
Consumers in China have also been fast to adapt to new technology, being at the forefront of digital payments (see figure below).
In 2022, China had 1,051 million people using the internet, of whom 1,023 million shopping online. This is more than the E.U. and the U.S combined (Sources Statistica).
https://www.statista.com/statistics/1131340/china-mobile-online-shopping-population/
Meanwhile, China mobile payments are no contest compared to the U.S. The U.S. spends 283B and China spends 47 trillion. If you see the growth from 2011 to 2021, the growth is quite large.
Source: Wall Street Journal
This gives rise to the prediction that China’s consumption could be one of the world’s highest over the next decade. Morgan Stanley has a forecast that China’s consumption could double by 2030 to 12.7% million.
This is why I have weighted the portfolio in ETFs such as the China Consumer Discretionary ETF and the core MSCI China which are prime to be the beneficiaries of this growth.
iShares MSCI’s top holdings have 4 consumer discretionary holdings and digital payments methods (Tencent) in the top 10 holdings.
MSCI China Consumer ETF
While many of the ETF’s large caps that make up most of the weighting are dual-listed.
China’s only ETF with many large-cap holdings within China is CNYA and this is leans towards China’s only listed companies that are listed on the Shanghai or Shenzhen exchanges. This is why I have included it in my portfolio. Making use of internal consumer supply which includes companies such as Kweichow Moutai with a market cap of $24.1 Billion (November 2022).
CNYA’s Top 10 Holdings
Chinese Tech
Two of the ETFs in Chinese tech Kraneshare and Invesco technology make up over a quarter of the portfolio respectively of the ETF for the hypothesis alluded to above about the growth in China, the changing economic makeup, a leading digital payment usage, and the world largest internet usage and raising middle class.
CQQQ invests primarily in Chinese companies within the Information Technology seen by the top 10 holdings.
While both holdings have big names, both also have holdings in Sunny Optical, a major supplier of lenses for Apple and Huawei.
Chinese Healthcare
This sector is one that I see has potential upside due to an aging population and the transformation in health care technology over the next 10 years. China is aiming to be a top biotechnology sector and has put a proportion of its portfolio into Chinese healthcare in the portfolio.
MSCI China health care ETF Nov 2022
Although, without doubt, China faces political and regulatory headwinds that were made evident in 2021 with both the crackdown on private education and large Chinese tech companies.
While more recently China has had economic problems with large debt. A property sector that has lacked regulatory oversight and has been used as a speculative investment for Chinese investors. The macroeconomic environment is challenging with high youth unemployment, de-population, and aging demographics.
However, if history is anything to go by and the transformation China has overcome in the last 40 years, it would be believed by many that China can overcome these challenges and change its economy to a more innovation-driven one. Therefore, holding a diversified portfolio in broad-based China ETFs and specific Chinese sectors will have the potential to grow long-term.
Notes
Holding may change in the ETFs and nothing is guaranteed, These are my opinions based on data that I have seen and interpreted.
If you have any questions, please contact me.
If you would like to see articles I have written on China, previously, here are some:
https://investmentsforexpats.com/new-portfolio-ideas-china-growth/
https://investmentsforexpats.com/how-to-invest-in-china-from-outside-china/
