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Dumped by Trump: what next for Asia?

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Written by: Darius McDermott
13/02/2017
Breaking up is never easy and the tearing up of the Trans-Pacific Partnership ('TPP' - a trade and economic framework agreed by 12 countries) will have been a blow for some Asian companies. But the effects may be less pronounced than many fear and I think Asian equities are one of the most attractive asset classes for investors this ISA season. Here's why.
Dumped by Trump: what next for Asia?

China offers support

China, which was never part of the TPP, has been quick to ‘comfort’ the countries abandoned by the US, stepping in with its own 16-nation Regional Comprehensive Economic Partnership. The gains from China’s initiative are not as great – the TPP was more comprehensive and went far beyond just tariffs – but, if successful, it could still establish Asia as the world’s trading powerhouse.

Those hurt most by the end of the US love-in are Japan, Malaysia and Vietnam, according to Sharaf Shroff from Matthews Asia, the specialist Asian investment house. Sharaf says that these countries may not have the same growth prospects now but, of the three, he is least worried about Vietnam:  Chinese and Korean companies will continue to relocate there as labour costs are more attractive.

On the other hand, China would be the clear beneficiary, both from an economic and political standpoint.

Valuations are attractive

The US stock market, and its largest companies in particular, are looking expensive and toppy on most measures now. The continual rise is almost too good to be true. In contrast, sentiment surrounding Asia is still very negative and, as a consequence, its smaller and medium sized companies are looking good value.

The ‘make America great again’ trade has been priced in in my view and, if I’ve learned anything in the past 20 years in this industry, it’s that it is easier to make money when you buy a company at a reasonable price rather than when it is very expensive.

There are clear risks in that the US is now in an interest rate rising cycle, but Asia is much better prepared for that today than it was in the taper tantrum of 2013. Most of Asia is living within its means, with stable inflation and high savings rates. Furthermore, current accounts are improving, unlike many other emerging markets.

The IMF predicts that Asia’s nominal USD GDP growth will outpace the developed world and profits should follow.

The consumer is still king

The one uninterrupted trend of the past couple of decades has been the growth in household wealth across Asia. With this increased wealth has come aspirations for a better way of life and all the products and services that that requires, as well as issues in the form of new ailments. So the services sector – which China in particular wants to grow – has been full of investment opportunities. This is still the case.

Retail sales and car sales all increased by more than 40% on average between 2013 and 2015. Company finance officers are now seeing the benefits of branding and advertising and even the relaxation of the one-child policy in China has had an immediate effect on demand for more baby products.

Asia is the largest and most populous continent in the world. It comprises around 50 different countries and is home to more than 4.5 billion people. I think it will do just fine without the US.

My favourite funds investing in Asian equities include Jupiter Asian Income, Matthews Asia Pacific Tiger and Schroder Asian Alpha Plus.

Darius McDermott is managing director of Chelsea Financial Services  

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