Why ignoring Asian markets might be risky?

Asian markets are often seen as volatile and unpredictable. Recent global events, like trade tensions between the U.S. and China, economic challenges in China, and rising U.S. interest rates, have made investors wary of these regions. Many are drawn instead to U.S. investments, which have dominated the market for years. However, completely avoiding Asian markets may increase investment risks.

Famed investor John Templeton once said, “Bull markets are born on pessimism, they grow on scepticism, they mature on optimism, and they die on euphoria.” Right now, the caution around emerging markets might create a favourable opportunity for those willing to consider them.

Why Asian stock markets deserve a closer look

Asian markets are diverse and can’t be simplified as “too risky.” Although U.S. stocks dominate the global market, they don’t represent the full picture of growth opportunities. With 85% of the world’s population living in emerging markets, including Asian countries such as China and India, and these regions contributing about half of global economic growth, the current low representation of these markets in global indices may be a missed opportunity.

The valuations of companies in Asia are generally lower, making them affordable for investors and potentially providing better returns over time. For example, the MSCI AC Asia ex Japan Index (which consists of companies in China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand) trades at a discount compared to the global MSCI World Index (comprised of companies in 23 developed countries globally). While each market is different, regions like India and Vietnam have high growth potential due to young populations, increasing urbanisation, and strong demand for products and services.

While the growth potential in Asian markets is significant, it’s important for investors to be aware of the risks. Asian markets can be more volatile than developed markets due to factors like political instability, weaker regulatory environments, currency fluctuations, and reliance on commodity prices. For example, sudden changes in government policy or trade relationships can affect market performance. Individual countries within the region may also have their own unique risks and economic challenges which can impact returns. Diversifying investments and maintaining a long-term perspective can help mitigate some of these risks.

Adapting to global trade changes

Although there are concerns about “deglobalisation”, only a small portion of global trade has been directly affected - primarily due to Russian sanctions. Trade routes are evolving, with many companies establishing operations in more regionally connected locations. In Asia, intra-regional trade has grown significantly, reaching US $4.5 trillion in 2023 - an 80% increase since 2016. Countries like India and Indonesia are benefiting from urbanisation and demographic growth, while nations with natural resources play a critical role in the renewable energy transition. Additionally, less developed Asian countries, such as Vietnam, are gaining market share as decentralised supply chains evolve. Rather than collapsing, global trade is indeed reconfiguring, with Asian markets leading the way in a new phase of re-globalisation.

Stability amid volatility

Despite recent global market fluctuations, Asian markets have shown resilience and while some economies saw their currencies weaken, several Asian currencies remained stable. This suggests strong economic fundamentals in many Asian countries. Furthermore, many assets in these markets remain undervalued, meaning they may be less vulnerable to economic shocks. In addition, many Asian companies have healthy balance sheets, giving investors’ confidence that they can navigate future challenges.

Strong value and growth potential

Asian company earnings trade at a discount compared to U.S. companies, partly due to investor scepticism. However, the earnings growth outlook for these companies is strong, with Asian markets projected to grow earnings per share by around 13% annually over the next three years—higher than expected growth in the U.S. market. Additionally, more Asian companies are adopting shareholder-friendly practices, like share buybacks and dividend payments, increasing their appeal to investors. Markets are rewarding these positive developments with higher valuations, as seen in the price recoveries of specific companies in Korea and China. This focus on shareholder returns, combined with strong corporate balance sheets, enhances the appeal of Asia as an investment destination.

Ignoring Asia could mean missing valuable opportunities

Asian markets offer a range of growth opportunities. For instance, India and Indonesia are benefiting from demographic growth, while Vietnam is seeing gains from evolving global supply chains. Current valuations, growth potential, and stability make these markets worth considering for investors seeking diversification and long-term value.

The true risk may lie not in the volatility of these markets, but in the opportunity cost of staying out of them. As companies across the Asia region continue to adapt, they offer a valuable source of growth and potential returns—making them an important consideration for any well-rounded investment strategy.

This summary is designed to provide a general overview and should not be seen as investment advice. Investors should consider their own circumstances and consult with a financial advisor before making any investment decisions.