Growth and stability lead to investment opportunities in Asia
A new Wells Fargo Investment Institute report finds growing economies and a focus on technology in Asia, and identifies potential investment opportunities.
During their 2017 investment research trip to China, Japan, and South Korea — their fifth since 2011 — Paul Christopher, WFII’s head of global market strategy, and Sean Lynch, co-head of global equity strategy, met with policymakers, business owners, and others to evaluate the investment landscape.
“If our firsthand experience showed us anything, it’s that all three countries are right now shifting toward more sustainable, stable economic-growth rates, but that doesn’t come without risks,” Christopher said.
Innovation and technology lead to market stability
The countries have boosted their competitiveness in manufacturing and technology in an effort to stabilize their economies, said Christopher, but they also face weakening population growth, rising debt levels, and concern about the prospect of a nuclear-armed North Korea.
Equity valuations for China, South Korea, and Japan have generally underperformed compared with U.S. valuations during the last five years, but Christopher and Lynch expect to see a change as digital technologies and innovations attract more investors.
“During our visit to China over the past five years, for example, we’ve found the shift from assembly and molded plastic to computers and other high-value electronics to be particularly impressive,” Christopher said.
Both said technology has taken center stage across emerging markets, accounting for about 27 percent of the assets in the MSCI Emerging Markets Index (which measures equity market performance through indices in 23 emerging economies, including Brazil, China, Mexico, India, and Taiwan), compared with 14 percent five years ago.
In fact, Christopher and Lynch expect technology to replace the more volatile commodity and materials sectors as the largest sector across these Asian markets in the years to come.
A focus on corporate governance
A changing landscape is leading to a greater focus on the way the three countries handle the issues of corporate governance and responsibility.
“Demographics and competition are allowing the main economies of East Asia to be more productive, innovative, cost-conscious, and to improve corporate governance,” Christopher said.
Japan, for example, enacted its first corporate governance code in 2015. The Government Pension Investment Fund of Japan, the world’s largest pension fund, now outlines key components of the governance code in its investment policies. Lynch said the reforms aim to include outside directors, improve dividend policy, and prioritize profitability — familiar themes to U.S. investors.
“I heard about important business changes underway, particularly in the areas of corporate responsibility and corporate governance — efforts that move slowly but are aimed at attracting more investors,” Lynch said. “There is a real focus on stability and sustainable, consistent growth.”
North Korea could cause 'investor alarm'
During their visit, Christopher and Lynch spoke with analysts, economists, government officials, and a former ambassador to the U.S., and they believe North Korea’s short-term aim is to use its nuclear threat to drive the U.S. to the negotiating table for a peace treaty that would include withdrawal of U.S. troops from the peninsula.
“We spoke with people who emphasized that North Korea fears for its survival, and feels threatened by the U.S. troop presence currently in South Korea,” Lynch said. “But, most of the people we talked to don’t believe a new war in the peninsula is coming.”
Lynch said continued uncertainty and financial market volatility is likely, and “there are a number of ‘what-if’ scenarios that could cause investor alarm,” including:
- North Korea detonating a hydrogen bomb over the Pacific Ocean.
- The U.S. imposing sanctions against Chinese businesses or trade.
- A U.S. attempt to intercept a North Korean missile test.
- Deployment of U.S. tactical nuclear weapons in South Korea and Japan.
Any of these scenarios could lead to a dip in global economic growth and a disruption to financial markets, so they are important to keep an eye on.
An opportunity for investors
While no investment is without risk, Lynch said there are ways that investors can try to minimize that risk. WFII suggests investors diversify their portfolios — to include both U.S. and international assets — and stick with their long-term investment plans rather than trying to predict the timing of potential impacts or scenarios.
Innovation and a shift toward a broader array of industries featuring technology and electronics should drive higher equity-market valuations over time and reduce market swings. That’s why “we recommend that investors consider including East Asian equities into their portfolios for long-term allocations in international equities,” Christopher said.
All investing involves risks including the possible loss of principal. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities. Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
Diversification cannot eliminate the risk of fluctuating prices and uncertain returns.
An index is unmanaged and not available for direct investment.
Wells Fargo Investment Institute, Inc. (“WFII”) is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.
The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.