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The US stock market notched up another succession of record highs this week, despite a weakening dollar and a number of other hurdles spread before it. Narrowing market leadership – gains have been increasingly focused on a small number of stocks – and the uncertainties posed by a forthcoming presidential election in November have, so far, failed to dissuade investors from backing the world’s largest market.

However, the uncertainties that lie ahead should not be underestimated. The US, like the UK, is in recession and American companies are expected to see their earnings fall by around 19% this year1. Optimism seems to be driven largely by the prospect of a further package of measures to boost US growth in 2021, although these are currently at the epicentre of a bitter dispute in Congress.

Investors seeking faster growing alternatives may want to consider Asia. First into the Great Lockdown and in better shape in the first place, many Asian economies have held up relatively well. According to analysts’ estimates, corporate earnings in the Asia Pacific may be on course to grow by around 1% in 20202.

While much of the rest of the world ponders the eventual shape of the economic recovery that follows the crisis, China is comparatively further down the road to finding out.

Unlike the UK and the US, China has avoided falling into a recession. Having shrunk by 6.8% in the first quarter of the year during a strict lockdown, China’s economy expanded by 3.2% over the next three months3. That compares very favourably with successive contractions of 2.2% and 20.4% on the same year-on-year basis in the UK and marks out at least the start of a recovery resembling a sharp “V”.

China’s policy responses to the crisis have been less impressive than in the west, but there have been some including several tax breaks and tax cuts to tackle the coronavirus, initiatives to raise infrastructure spending at local government level and modest reductions in interest rates.

While the coronavirus threat continues to bear down on consumer demand, Chinese retail sales have been recovering since the start of this year. Data out this week confirmed that, while monthly sales remain significantly below their year-ago levels (1.1% lower in July), demand is on a slow but steady path back to normality4.

That’s important for China’s expanding domestic consumer economy, which has accounted for an increasing share of the country’s economic growth over recent years. Improving trends in industrial production are now fairly firmly established; a sharper rebound in consumer demand is eagerly awaited.

That would be welcome news for consumer facing companies like the online gaming giant Tencent and China’s answer to Amazon – Alibaba. Already the results from these companies have displayed considerable resilience as consumers have accelerated their transitions online. Alibaba this week reported a strong operating performance in the second quarter, with net income increasing 42% over the same period a year ago5.

This week too, the mining giant BHP said it expects China to be the only major world economy to grow this year, while developed economies have to sit it out until 20216. BHP and fellow mining giants like Rio Tinto and Fortescue have reported record shipments of iron ore over recent months – the key component in steel production – the bulk of it to China7.

Elsewhere in Asia, the most industrialised nations such as South Korea and Taiwan have benefitted from China’s rebound and being in strong positions to adapt to the worldwide trend towards a socially distanced, touch-less society. Taiwan Semiconductor, for instance, is an important supplier of chips to Apple.

These Asian countries have benefitted too from a low exposure to the oil and coal markets, while low prices have afflicted others in the region including Indonesia8.

The skewness of success both in China and beyond reaffirms the importance of an active investment approach in the region. Fidelity’s Select 50 list features a number of funds that invest highly selectively across the Asia Pacific.

The Merian Asia Pacific Fund is one such example. This fund draws on an investment process designed to filter out investor behavioural biases instead taking decisions according to purely objective criteria. Current top holdings include the Chinese consumer stocks Alibaba and Tencent, along with the electronics makers Taiwan Semiconductor and Samsung Electronics. The Fund is fairly evenly split between emerging and developed Asian countries.

The Matthews Asia Funds – Pacific Tiger Fund invests in companies with sustainable long-term growth prospects and has a relatively high exposure to Asian domestic consumer companies. Alibaba and Tencent feature prominently here as well, alongside the pan-Asian life insurer AIA Group and China Resources Land.

Source:

1 FactSet, 07.08.20
Yardeni Research, Inc., 13.08.20
National Bureau of Statistics, 17.07.20
National Bureau of Statistics, 17.08.20
Alibaba Group, 20.08.20
BHP, 18.08.20
South China Morning Post, 31.07.20
Bloomberg, 20.08.20

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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