Last updated: 09:50 / Thursday, 4 December 2014
Outlook by Aberdeen AM

"The Question to Ask Is What Percentage of the Portfolio Should Be in Asia and the Answer Should Have Two Digits"

"The Question to Ask Is What Percentage of the Portfolio Should Be in Asia and the Answer Should Have Two Digits"

There is no stopping Asian development, and the best proof of this is the increasing urbanization rate of these countries, which in turn results in an increase in life expectancy, increasingly higher per capita income (especially in the big cities) and, although it may seem an unimportant detail, the constant growth in the use of technology, especially mobile phones. For Donald Amstad, Director of Business Development for Asia at Aberdeen AM, the most representative example of this trend is South Korea, which should serve as a role model for other regions.

Taking into account that Asian currencies are generally cheap, while fixed income offers good returns -especially Asian dollar-denominated bonds which are trading at significant discounts compared to their American counterparts- and equities are not expensive either, investors should have exposure to Asia in their portfolios.

"In this scenario, the question to ask is what percentage of the portfolio should be invested in Asia, and the answer should have two digits," said the expert, during a recent presentation in Madrid.

During his speech, Donald praised Asia’s growth potential, which is being ignored by developed countries, even though it now contributes 30% of global GDP, and estimates suggest that this figure will rise to 50% in 2050.

And for the first time in many years there is no negativity regarding China in Aberdeen. The reason is that the government has undertaken important steps, more and more people migrate from rural areas to cities, and they are also taking steps to liberalize markets, such as the recent connection between the markets of Shanghai and Hong Kong. They believe that, although growth is slower, a situation like Lehman Brothers is not about to happen. "The government has invested US$4 trillion out of the country and the same amount in domestic companies."

According to Amstrad, however, the Asian region with the highest potential is India. "It's definitely the emerging country with most investment opportunities." And this is due to the good measures taken by both the Prime Minister, Narendra Modi, and the Governor of the Central Bank of India, Raghuram Rajan, although there is still much to be done. For example, in spite of its huge population, the percentage of workers is increasing.

Opportunities in emerging markets’ fixed income

Investment opportunities are also to be found in fixed income. As advocated by Steven Nicholls, Head of Fixed Income Product Specialist, the potential of emerging regions is unquestionable. These are regions with a large population, where demand for goods and services is growing, and an "example of this, as Donald said, is the ever increasing use of mobile phones and internet, and not only among the young." Also, people in rural areas have greater access to information and banking institutions, with transactions, for example, becoming more common.

This does not mean that there are no risks, however, although generally they have more solid and stronger balance sheets than ten years ago and lower levels of debt. In addition, much of the debt is denominated in local currency. "But we must be selective with the countries that are chosen."

"We believe that besides the growth potential offered by these countries, another indicator that they will continue to give good yields is that demand should be supported in part by institutional investors in high yield corporate issues," said the expert.