The best way to access Asian ex Japan equity market
In my view, the best way to access this market is through active funds managed by fundamental stock pickers who have the relevant knowledge and skills to select the best quality companies with good corporate governance. These companies directly benefit from the “new economy” across consumer staples, internet and healthcare areas, in contrast to passive solutions which replicate the indexes in which the SOE banks and property companies known for lack of transparency are still large parts of index constituents.
Another reason to support active management is the lower efficiency and coverage in certain Asian markets such as Vietnam, ASEAN or Chinese A shares. The Chinese domestic stock market is still predominantly invested by Chinese local retail investors (> 80% participants) despite the Shanghai-HK Stock Connect which provides easier access to foreign investors. The price dispersion and lesser institutionalization of the A shares market provide fertile hunting ground for alpha, in particular for those long-term patient investors. This is because retail investors in China are predominantly “day traders”. This actually provides the backdrop of the ideal investment environment that many active fund managers are longing for, contrary to very efficient markets such as US large-caps.
If you invest with a skillful Asian ex Japan equity fund or China fund (including A shares) whose manager has a deep expertise of selecting fundamentally strong companies, you’ll have the possibility of benefiting from the domestic secular growth themes beyond “Tencent”, “Alibaba” or “Baidu”, those outstanding globally-known Chinese internet gurus, but also well-established “local gems” which are beneficiaries of domestic consumption stories, high-end education providers, in some sort of “Kweichow Moutai”, “NetEase” or “New Oriental”… and more “hidden gems” at discounted prices when market offers the buying opportunities.
An anecdote for those who are interested in understanding the younger generation of Chinese entrepreneurs. I happened to watch a film called “American Dreams in China” – 《中国合伙人》on my London-Singapore flight to visit some Asian fund managers in 2013. The film is inspired by the story behind the three co-founders of New Oriental Education & Technology Group (EDU:US)新东方 and how they built the successful education company in China from scratch. Beyond the story itself, the film described the generation of the 90s and early 2000s in China who were eager to study abroad and explore the “American dream”… It was quite a phenomenon in China 10 or 20 years ago. At least one out of two undergraduate students from top universities in China would spend their summer holidays at the campus of New Oriental in the suburb of Beijing to study TOEFL and GRE, with the goal of being accepted by top universities in the US…”New Oriental” probably helped two generations of top brains in China to fulfill their American Dream… The question is what next? If Trump is denying visas to Chinese students who are following online courses from US universities? Short-term impacts? Long-term trend for a business which has diversified its business lines to offer domestic primary and secondary school tutoring? From online to offline?…
