It’s all relative.
In the U.S. — a nation trying to recover from the economic devastation of the Covid-19 pandemic — a growth rate of 6.4% sounds pretty good. But that’s until you see the International Monetary Fund forecasts for China and other Asian economies in 2021.
China’s economy is expected to close the year with an 8.4% growth rate. And in India, the economy could expand by 12.5% this year, the IMF estimated in an April report, though that was before the recent surge in Covid-19 cases that has left the country battling the world’s worst coronavirus crisis.
Beneath that top-line growth are a wealth of investment opportunities across a host of Asian countries. But while the potential for profit is great, many financial markets in the region aren’t yet as liquid or as deep as those in the U.S. and other developed nations.
As in the U.S., inflation is a concern, and further waves of Covid-19 could hurt recovering economies. That makes finding spots to invest right now particularly challenging. To help zero in on some of the most promising pockets of growth, Bloomberg asked money managers for their best ideas on where to invest an extra $100,000 — assuming investors already have a substantial well-diversified portfolio.
The themes the experts highlight range from cloud-based software providers in South Korea to value stocks in China and private credit funds in India and Australia. When money managers were asked where they would spend $100,000 in a personal passion, their answers were also enlightening — from Chinese modern art to Charles Schulz’s Charlie Brown books.
For those who want to invest around the panelists’ ideas using exchange-traded funds, Bloomberg Intelligence analysts provide suggestions for ETFs to explore.
Inbok Song
Co-manager, Matthews Pacific Tiger Fund
In the past, Asia’s growth has been driven by fixed-asset investment in factories, houses, machinery — expenses on capital goods. Going forward, growth will be driven more by operational expenses. That means more companies need to invest in research and development, and in human talent.
For a company to be more competitive, it needs to improve productivity. As firms invest more in human talent, the way to improve productivity is to adopt more software. This will accelerate the development of domestic software companies in Asia, especially cloud-based ones.
In countries like South Korea, China, Taiwan and some Southeast Asian nations, the internet and mobile infrastructure is newer and faster, without legacy systems that need to be fixed. Rising labor costs and competition have corporate customers wanting more software to improve productivity and expand end markets. Additionally, a rapidly developing online ad market is becoming a powerful monetization tool for software companies.
Within small- to mid-cap cloud-based companies, the variety in terms of business model and focus is quite comparable to the U.S. Adoption has been very fast, not only by large corporations, but also from small and medium-sized companies because a good part of these businesses tend to start as Internet-based and software is a must-have.
With software, understanding local business practices is very important. Localization is one of the advantages Asian companies have compared to the global companies in Asia.
You can find good investment opportunities in China but also in South Korea, Taiwan and some parts of Southeast Asia, especially in the small to mid-cap space. There’s a local cloud-based enterprise solution provider for small and medium-cap companies out of Korea. In China there are more “verticalized” players in areas like construction, healthcare and finance software.
How to play it with ETFs: If you want exposure specifically to China’s IT sector, you could look at the Global X China Cloud Computing ETF, says BI senior internet analyst Vey-Sern Ling. Top holdings include local giants like Tencent Holdings Ltd. as well as data center providers like GDS Holdings Ltd. There isn’t yet an ETF focused on the trend for the wider region.
Another way to play it: I would put $50,000 in old books, like the Charlie Brown books. I grew up in Korea and even there Charlie Brown was very popular, so the books have value not only in the U.S., but in Asia. I personally feel sad I don’t have a bookstore in my neighborhood anymore, and maybe in 20 to 30 years books will be a rare item. The other $50,000 I’d use to invest in NFT art. I’m not a Bitcoin investor but I acknowledge the importance of blockchain technology and the metaverse and those kinds of things.
Jason Hsu
Chairman and Chief Investment Officer, Rayliant Global Advisors
In 2020, mainland Chinese value stocks underperformed growth shares by a whopping 39%. Therein lies the opportunity for investors. Unlike the U.S., where value stocks have relentlessly underperformed for 15 years (by 4.5% per annum), Chinese value stocks have reliably outperformed (by 2.5% per annum) and have only recently struggled.
The million-dollar question is whether the massive 2020 value underperformance forecasts a reversal or continuation in style performance. So far in 2021, China value stocks have outperformed China growth shares.
To give context to the value versus growth dynamics in China, the mental analogy for China growth is more Tesla on steroids with a dose of GameStop — thematic retail darlings — than companies like Apple, Google and Microsoft. Chinese value stocks are financials and low-tech consumer plays — restaurant chains and appliance-makers — with strong and growing cash flows benefiting from the rise of China’s middle class.
The rise in household wealth as China continues to emerge has meant unsophisticated hot money entering the stock market and chasing hot themes that fizzle out. Yet it has also meant reliable growth in consumerism and consumption of financial products and services. What is growth in China often equates to speculative bubbles in the West, while value maps more naturally to what is considered growth at a reasonable price (GARP) in the West. One way to play this theme is with the Hong-Kong listed Premia CSI Caixan China Bedrock Economy ETF. [The ETF tracks an index developed by Rayliant.]
How to play it with ETFs: If you want exposure to fast-changing consumer trends in China, you could consider the Global X China Consumer Brand ETF, says Catherine Lim, BI senior analyst, Asia-Pacific consumer discretionary and retail. Its holdings are all in industries where brand names hold sway with the consumer. Top holdings include spirit manufacturer Kweichow Moutai and China Tourism Group Duty Free Corp. It has assets of HKD $1.2 billion ($155 million) and an expense ratio of 0.68%. If you wanted straight exposure to China’s banks, then the Global X MSCI China Financials ETF tracks the biggest players, says BI senior banking analyst Patrick Wong.
Another way to play it: I’d go long Chinese art. I collect modern Chinese art. I have pieces from young artists like Wu Jian’an and Zhao Zhao, in addition to Ai Weiwei. I think the biggest bargain buy is Wu Jian’an right now. Chinese art, whether traditional masters or modern works by controversial artists like Ai Weiwei, could be the next darling assets with the Asian high-net-worth population, given the true scarcity and the rise in Asian cultural influence.
Prabhat Ojha
Managing Director at Cambridge Associates
Asian private credit stands out as an attractive investment. Public credit markets in the U.S. and Europe are richly priced. There has been significant private credit capital raised in these markets, which does not portend well for returns. While Asian private credit has also attracted significant capital, it’s a fraction of what’s raised in the U.S. and Europe.
Specifically, we like private credit funds focused on opportunities in Australia, China and India. In Australia, tightening bank regulations have constricted bank lending to the real estate and resources sector. In China, the continuing crackdown on shadow banking, the “three red lines” policy for the real estate sector and more recently, defaults and restructurings at large state-linked firms has created an attractive opportunity set for credit managers who can navigate through the volatility.
As for India, there are two main concerns: First, its banks have been in a relatively poor state even before the pandemic. Second, the distress in the non-bank financial company space has resulted in a shortage of credit even for healthy borrowers. More broadly, Asian credit markets are underdeveloped and under-researched. We believe there is a long-term opportunity in Asian private credit, driven by this supply-demand tension.
Cambridge Associates has been investing in a select group of private credit managers who have built local teams and infrastructure and have a deep understanding of each Asian market they invest in. The investment professionals have been through a few credit cycles including the Asian and Global Financial Crisis. These private credit fund managers have delivered compelling returns on their recent fund vintages and we believe that they will continue to deliver attractive returns for our client portfolios.
How to play it with ETFs: Private markets are one of the rare areas where there is no ETF to suggest as an investment proxy, says BI senior ETF analyst Eric Balchunas. To gain exposure to this, you’d need to look at investing in an actively managed fund.
Another way to play: My wife and I love South East and South Asian art. Even established artists in this genre are available at reasonable prices vs. their Western or East Asian peers. During our travels across the region, we make it a point to visit the galleries and museums. Over the last year though, we have found ourselves on e-auctions by some of our favorite galleries, a virtual paddle in hand, typing out our bids – was quite a fun way to relax.
Nikhil Kamath
Co-founder and CIO, True Beacon and Zerodha
I’ve enjoyed playing chess since I was a kid, and it’s taught me a lot. It’s about not just securing your key positions but also taking a few risks to bring home a win.
With India still largely an unbanked country, opportunities in Indian fintech are enormous. For people with a higher risk appetite, its start-up ecosystem is a potential goldmine. By fintech I mean something as vague as around financial market education, a stock market exchange, any ancillary company around the financial markets.
These companies offer a great opportunity as the equity market continues to grow in India. We feel the story is nearly done in the pure-play financial services or banks, but there is a lot of value to be found if we focus very specifically on financial and equity-market related companies.
The Indian government wants increased financial inclusion, and wants more people to have access to banking. They don’t want people to take their money and buy real estate, or gold. They want you to buy financial instruments because it is very easily taxable and can be regulated. If you buy gold, the money goes out of the country, as the metal isn’t manufactured at home and most of our gold is imported and thus contributes to our fiscal deficit. If you invest in real estate, you are largely locking up your capital and no transaction happens for a significant period of time.
With extremely low penetration of about 1.5% of the 1.3 billion population in the financial markets, it’s a fair wager to say that the percentage is going to go up. Compare it to a Western developed economy, where the number is 50% to 60%. When you look at it from a long-term perspective, when you are betting on India and the India story, the best way to do that is to be part of a company that is driving that story.
How to play it with ETFs: Most pure-play exposures to the Indian fintech world are only available in the private deals space right now or for the high-net-worth clients of private banks, BI’s Asia banking analyst Diksha Gera says. One indirect way to gain exposure to the trend if you think existing companies will benefit from greater online penetration would be via the Nifty India Financials ETF. Its biggest holding is private bank HDFC Bank Ltd., where 85% of its customer transactions are done online. The ETF also has 36% of assets in India’s diversified financial sector.
Another way to play: It’s no secret that I love watches, but I’d like to add how I think of them as an investment, too. For example, the value of old mechanical watches has appreciated during the pandemic. I have my eye on another F.P. Journe — a Swiss brand that makes only 900 watches a year. The great thing about it is that the founder of the company is still alive and designing watches. Anything that you can get your hands on will probably appreciate by 20% or 30% over the next decade.
Toh Tat Wai
Head of Portfolio Management, RBC Wealth Management, British Isles and Asia
We see the emergence of a new global investment theme in sustainable technology, where innovation and technology are creating lasting sustainable solutions for the next generation. We believe that the companies which are at the forefront of developing technological solutions to sustainability issues offer some of the most compelling long-term investment opportunities. We call this “SusTech” and believe that there are five key areas where technological developments are likely to be far-reaching: green tech, food and agri tech, fintech, health tech and smart cities.
As part of the 14th Five-Year Plan for the transition to a green economy, China is committed to net-zero carbon emissions by 2060, and its commitment to sustainable technology is evidenced by its leading 5G, smart city and electric vehicle development. With a $15 trillion investment over 40 years, we see Chinese solar and wind technologies, and electric vehicles as the most prominent sectors in the transition and the best opportunities for investment. SusTech can be a satellite investment that complements a client’s core holdings and adds diversification benefits. The portfolio, allocation and risk-reward can be optimized depending on the client’s risk profile.
Beyond sustainable technology investment opportunities, China continues to be the fastest growing major economy in the region. We expect China’s equity market to be supported by strong earnings and a better liquidity outlook. We remain positive in the outlook for China A-shares.
How to play it with ETFs: For Chinese sustainable technology, you could look at the KraneShares MSCI China Clean Technology Index ETF, BI’s Vey-Sern Ling says. It invests in a range of green technology companies from electric vehicle maker Nio Inc. to solar products maker Xinyi Solar Holdings Ltd. It has an expense ratio of 0.79% and assets of $145 million.
Another way to play: I have recently started investing in bullion coins like gold Canadian Maple Leaf coins and American Eagle gold and silver coins. Their values have increased slightly over the past year but, as an amateur, I’m interested in them more for the artistic value they represent as products from various periods of history than their bullion value. Furthermore, I intend to pass on my collection to my children in the future. If $100,000 fell into my lap, I would like to expand my collection with different coins of interesting iconography. My dream coin is the Saint-Gaudens Double Eagle (1907), as it is a rare coin that has proved difficult to reproduce because of its sophisticated design. One such coin can fetch close to $8 million.
— With assistance by Abhishek Vishnoi
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Where to Invest $100,000 In Asia: China Value Stocks, Cloud Software, NFTs - Bloomberg
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