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Five ways to play Asia's growth story and avoid its pitfalls

Euro Stars AA-rated manager King Fuei Lee reveals where investors are going wrong on Asia and how they can correct it.

Reading the wrong signs

One of the first things Euro Stars AA-rated manager King Fuei Lee, who is head of Asian equities at Schroders, says investors are mistaken on when it comes to Asian equities is what signals they should trust.

‘Traditionally, investors hoping to participate in a country’s economic growth try to do so by investing in the country’s stock market, often through index funds and actively managed relative return funds,’ explains Lee.

‘After all, conventional wisdom is that the faster an economy grows, the more corporate profits in the country will grow, and hence the higher the stock market returns the investors will achieve. This could not be further away from the truth.’

Lee points out that if you had invested $1,000 in the MSCI China index in 1993, it would have dwindled to $660 in 2011 despite China’s economy booming over this period.

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Depend on dividends

‘One of the reasons for the poor relation between economic growth and investment returns stems from the fact that the total return from the stock market is really made up of two components, namely capital appreciation and dividend return,’ he says.

Lee states real dividend to share growth is found in academic studies to be strongly correlated to GDP per capita growth. This is because corporate earnings are directly driven by the state of the economy.

Expert tip: ‘Those seeking exposure to the multi-decade Asian growth story should pay close heed to the dividends that they are capturing from their equity investments.’

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Ignore the index and go small

Global cyclicals dominate the Asian market and therefore the performance of the index does not reflect the strength of the economy, says Lee. He says poorly covered small cap stocks can therefore lead to greater inefficiencies.

Expert tip: ‘Ignore the benchmark when investing in the region and focus on companies that genuinely benefit from favourable domestic dynamics.’

‘Look further down the market capitalization spectrum as small- and mid-cap companies in Asia typically earn a greater proportion of their revenues domestically.’

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You buy stocks, not countries

Lee says many concerns persist about how shareholders are treated and whether they are missing out on the real growth story to insiders and executives. But, Lee says, investors need to look beyond these concerns.

‘Despite the hype about the tremendous economic growth in Asia over the next few decades, it is crucial for investors to realize that ultimately it is stocks that make up their portfolios, not markets or countries,’ he says.

Expert tip: ‘Look for companies which are able to channel the growth back to shareholders in the form of high-quality earnings, and delivered within a system of strong corporate governance and sound business practices.’

‘Performing in-depth bottom-up research on companies and understanding their business models and earnings drivers will go a long way in helping investors crystalise the Asian growth story in profitable equity investments.’

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The value of value

‘Just as with investing in growth stocks, the returns from investing in growth markets can be pretty meagre if the future growth is already reflected in the prices,’ says Lee.

‘With the region currently trading at 1.7x price-to-book and 13.9x price-to-earnings, valuations are thankfully reasonable compared to longer-term averages.’

Expert tip: ‘For long-term investors looking to participate in the Asian growth story now is as good a time to start accumulating,’ says Lee.

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