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We hold two carefully selected funds which invest in the Asia Pacific region in our model portfolios and also have a small allocation to India within our Growth and Aggressive portfolios. Two factors dominate discussion of the region at the moment. Firstly, the next round of trade discussions between the US and China and whether this will influence global equity markets in 2020. Secondly, the news that the coronavirus has begun to spread outside of China, prompting discussion on the possible impact on regional trade and economic growth. We are taking both of these factors seriously and will be monitoring the situation closely. However, there are still reasons for long term investors to have a positive view on the region and specific countries within it, in particular, China, India and Japan.  

2020 represents the final year of the 13th five-year plan devised by China’s ruling Communist party. One of the key targets of the plan is to double the country’s GDP between 2010 and 2020. To achieve this, China will need to deliver GDP growth in the region of 6% next year. The Chinese government is therefore likely to continue to stimulate the economy to try and achieve their goal. China also has a long term plan to develop and expand its companies in the aerospace, IT, semiconductors and robotics industries. There are some intellectual property disputes around these developing industries to be settled with the United States in the coming year. However, in the long term the emergence of viable Chinese companies in these growth areas creates investment opportunities for funds which invest there. We recently spoke to the manager of the Schroder ISF Asian Total Return fund and had a detailed discussion of the portfolio. It has exposure to consumer companies which benefit from rising affluence in China and selected telecom, internet, pharmaceutical and financial services companies based on a positive medium to long term outlook for these sectors.

In India, last year’s national election handed the incumbent Prime Minister Narenda Modi a landslide victory and a further five years in power. This gives him the opportunity to implement his radical and sometimes controversial reforms, which aim to cut bureaucracy and unlock the potential of the Indian economy. We continue to favour an active management approach to the country because the Indian equity market has historically been volatile, so we have selected a fund which follows a more defensive approach focused on good quality companies. It is particularly important to keep tabs on the governance of Indian companies because many are owned by powerful founding families and have intricate ownership structures, with conglomerates controlling several businesses, which may operate in different sectors. Oversight is therefore important, and we are comfortable with the detailed “on the ground” checks made by the team at Stewart Investors, the managers of the Indian Subcontinent Sustainability Fund which is included within our Growth and Aggressive model portfolios.

The Prime Minister of Japan, Shinzo Abe , has prepared a large fiscal stimulus package in a bid to boost the Japanese economy in 2020, which may also see a one-off effect from the summer Olympics in Tokyo. Additionally, the Bank of Japan continues to provide liquidity to financial markets through its quantitative easing operations. In particular, it is still targeting purchases of exchange-traded funds tracking Japanese equities, which helps to provide a floor for the market. Since Abe came to power in 2012, Japanese companies have been encouraged to follow better governance. One positive effect from this is that companies have been steadily increasing their dividend payments. The estimated dividend yield on the Topix 500 index, which tracks large Japanese companies, is about 2.5%, higher than the 1.7% yield for the US S&P 500.

This article is for information purposes only. It does not constitute investment advice and is not a recommendation to invest. The value of investments and the income from them may go down as well as up and you may not get back your original investment.

Date of publication: 14 February 2020

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