We sometimes wrongly assume that a new year translates into a major turn of events. Take the end of 2020, when some expected the calendar change to herald a simple dissipation of Covid measures. Or more recently, when some might have hoped that the volatility in Chinese markets would be consigned to 2021.
While Russia continues to grab the headlines, a fresh sell-off in Chinese shares reminds us that Asia funds can be just as vulnerable to upsets as their broader emerging market counterparts. The problems in China – prompted by Covid measures and geopolitical tensions among other things – also cast a fresh light on the lopsided structure of the Asian market.
We’ve previously discussed the fact that Asian indices have a chunky China allocation: the country made up 36.4 per cent of the MSCI AC Asia ex Japan index at the end of February, with an additional 7.2 per cent in Hong Kong. With the MSCI China index down by more than a fifth in terms of sterling total return in 2021 and by more than 12 per cent for 2022 as of late March, that allocation has been a big headwind for Asia portfolios. But active managers who buck the trend by looking beyond the market leaders can reap rewards when those giants run into trouble.
We are already seeing that this year. A good number of Asia funds and investment trusts have had a better 2022 than the MSCI AC Asia ex Japan index so far, for various reasons. These include some “Pacific ex Japan” trackers, which tend to focus largely on Australia and represent a fairly niche investment. What’s more interesting is plenty of the best performers so far this year have been equity income funds. As of 21 March, the MSCI AC Asia ex Japan index was down 6.2 per cent. By contrast, Jupiter Asian Income (GB00BZ2YMT70) had made a 2.8 per cent total return, with Janus Henderson Asian Dividend Income (GB00B6193536), Schroder Asian Income (GB00B559X853) (and its “maximiser” equivalent), BNY Mellon Asian Income (GB00B8KPW262) and Henderson Far East Income (HFEL) also registering some modest gains.
What’s interesting is these funds tend to be underweight the Chinese market, and seem to be either not exposed or only lightly exposed to the big Chinese tech stocks. This is probably a function of where dividends are, for example, many have at least reasonable weightings to Australia, a good dividend payer of the last year.
Elsewhere, we continue to see very different performance from other parts of the Asia and emerging market investment universe. Indian equities have held up relatively well this year, in contrast to what’s happening in China. That’s good news for funds that rotated from China into India in the last year or so, and an important consideration for investors brave enough to back single country funds.
Last year we noted signs that investors had attempted to buy the dip in China via investment trusts focused on the country and other funds such as KraneShares CSI China Internet UCITS ETF (KWBP). While we would generally advocate a diversified approach over riskier granular plays, it’s worth noting what is and isn’t working in this lopsided market.
