Silverhorn
Hong Kong (ots/PRNewswire)
The Asian market is finally consolidating after a strong gathering. A sharp reversal in Asian market development has reignited global investors’ interest in increasing their allocation to Asia. From peak to trough, the MSCI China Index rallied an amazing +59% after falling 62%.
With 17 years of on-the-ground experience in Asia, Marco Klaus, Silverhorn’s Chief Investment Officer, discusses how global investors should consider the risks and exposures before investing capital in Asia.
China and Asia are an important part of the investment universe. How much exposure should a global distributor include in their portfolio?
Marco Klaus: “This question is an excellent starting point for distributors. One end of the extremes is certainly to look at Asia’s share of global GDP, which is around 45% today and will rise to 50% by 2030. If we look at the growing middle class in the region, consumption is expected to account for 50% or more of global consumption by 2030. This illustrates his power in a global context.
On the other hand, if you look at the MSCI All Country World Index, the allocation in Asia is significantly lower. Today it stands at ~10%. In our opinion, the ideal point for Asian exposure today is between 20% and 30%.
20-30% is on the higher end for a global distributor outside of Asia. How can risk positions be allocated according to different asset classes?
Marco Klaus: “Size is not necessarily a problem. Asia offers such a great opportunity that arises in both public equity and public fixed income markets. Distributors may consider a multi-asset approach. Additionally, they may choose to diversify across public and private markets to tap into different growth drivers. Today, exposure to the vibrant startup ecosystem in China, India and Southeast Asia offers tremendous benefits for a global portfolio.”
What’s stopping global investors from expanding more in Asia?
Marco Klaus: “There are many reasons, in particular a lack of familiarity, a high risk of being perceived and prejudice in favor of one’s own homeland. Asia is not easy to understand. I can say that even after 17 years on the ground I still need to follow closely and speak to partners regularly to get a full picture of the landscape. The region consists of multiple countries, cultures and market idiosyncrasies. For this reason you have to be close to the market and be able to understand complex systems.
Commitment to the region ties up resources. It takes a dedicated team to keep up with the rapidly changing nature of the market. If there is no team yet, you have to travel regularly to understand what is really happening on the ground. This has not been possible or practical in recent years. However, there are trusted local partners who can also play a crucial role in unlocking the opportunities that exist.”
Another concern for the minds more global distributor is the political risk. The suppression of the education sector has, overnight, Billions of dollars wiped out. How do we deal with that?
Marco Klaus: “Political risks are real and tend to move on a pendulum. In recent years it has clearly been at the higher end of the spectrum and has affected many sectors. We now appear to be entering a period of reduced political risk. Excesses and undesirable business practices were addressed, with the focus clearly shifting back to growth. Chinese authorities tend to let things run freely to a point where the dynamic either raises concerns about systemic risk (e.g. real estate) or runs counter to the party’s long-term goals (e.g. the burden of after-school tuition costs on household spending).
Understandably, such incidents leave scars. The suppression of the after-school tutoring industry was a painful experience for foreign investors. Still, the company represented less than 1% of China’s market capitalization (Silverhorn China Briefing “Schooled by the education’s new rules”, August 2021) and therefore had limited impact on a diversified portfolio. Therefore, my advice is simple: diversify, focus on policy direction and attention to signals. The last one is the hardest part and requires more access to expertise than some unpartnered global distributors might have.”
How can portfolio construction mitigate these risks?
Marco Klaus: “Portfolio construction is key to mitigating the risks inherent in Asian markets, including political risk, corporate governance risk or currency risk. It’s the same logic that applies elsewhere.
First: It is important to create a framework for the investment strategy. When you know how much to allocate to Asia, you need to think about the various risks. So the investment strategy framework would mean that you start thinking down from a macro or policy risk perspective. For example, how much directional market risk are you willing to take at any given time?
Second, consider how you plan to invest across asset classes and how their risk-return profiles correlate to build a robust portfolio. The great thing is that today this region offers a greater opportunity than ever before. So, not only can you walk along the market, but you can also earn returns using various strategies that employ shorting or hedging techniques.
Through the private markets, investors can take advantage of growth opportunities that are not available in the public markets. Maybe in a few years, once these companies go public, you’ll be able to participate. Until then, a large part of the value creation will take place on the private side.”
Where do you see the short-term opportunities?
Marco Klaus: “The past year has shown how difficult it is to stay invested in a very stressful environment where things seem to be getting worse.
But where we are today, there are many great opportunities. How quickly these will pay off is another story. On the fixed income side, many loans have yet to fully recover from the Chinese real estate crisis and its aftermath. On the equity side, valuations are still attractive while company fundamentals remain solid. For example, we continue to be drawn to the “equity stocks” theme. Additionally, we see compelling opportunities to capitalize on increased volatility and yield dispersion (e.g. relative value strategies).
In the private market, valuations have softened (albeit with a lag compared to the public markets). We see this as a healthy adjustment as it has thrown the market a bit off course. We continue to focus particularly on the risk area.”
Important learning content
- Asia is an increasingly important part of the global investment universe. Distributors should consider meaningful exposure with an ideal point between 20 and 30%.
- Investing in Asia is a daunting task. The political risk is real, especially but not only in China. Creating an investment concept and diversifying risk across countries, sectors and asset classes are key to building a robust portfolio.
- Distributors must weigh whether they have sufficient resources and skills to implement and oversee their portfolio, or whether it is advisable to work with local experts who have advocacy teams in the area.
Photo – https://mma.prnewswire.com/media/2043053/Silverhorn_CIO_Marco_Klaus.jpg
View original content: https://www.prnewswire.com/news-releases/navigation-durch-risiken-in-asien-301800765.html
Press contact:
Daniella Lopez,
[email protected]
Original content by: Silverhorn, transmitted by news aktuell
