It is the question on many a wealth manager’s lips: how do you provide clients with exposure to Asia’s booming growth story, when many are still so risk averse? Yogi Dewan, chief executive and founder of multi-family office Hassium Asset Management, gives WealthBriefing his tips.

WB: Do investors want exposure to Asia at the moment?

YD: Many investors want exposure to Asia but this is not as straightforward as it looks. Consisting of a rich variety of countries, cultures, languages and resources, Asia covers less than 9 per cent of the world’s surface but contains 60 per cent of the world’s population.

When looking at Asia the two most important decisions investors need to make are: a) where are you going to invest and b) how will you invest. As an asset class it is not for the risk averse. In the short term we expect Asia, along with broader emerging markets, to trade lower on the back of increasing geopolitical risk, inflation concerns and overstretched market valuations. Whilst we are short term cautious, our intention is to significantly increase our exposure to Asia over the coming years. 

WB: How have you changed your exposure to the region in light of recent global turmoil? 

YD: Japan’s recent devastating earthquake/tsunami has pushed the economy back into recession. The stock market initially fell 19 per cent and despite partially recovering still remains -8.6 per cent off of pre-earthquake levels. The Nikkei is -4.4 per cent YTD with an estimated PE of 16.1.  Some 60 per cent of Japanese companies are reportedly trading at or below book value on the stock market following its sharp post-earthquake fall and partial recovery.

Since then we have seen the yen strengthen following large repatriation of funds. In the days following the earthquake we increased our local currency Japanese equity exposure so have benefited from both the stock market and currency appreciation.  We are long-term positive on Japan as, in the next few years, the large infrastructure re-building programme will benefit the economy. Our preferred way of investing is via the Nomura Nikkei 225 ETF.

WB: What are your thoughts on China?

YD: China is now the second largest economy in the world, with the highest population. YTD China is -0.83 per cent with an estimated PE of 12.8. It is facing an internal challenge of reducing reliance on investment, which currently constitutes 50 per cent of GDP, and increasing the spending power of domestic consumers. US consumption is estimated at a third of total world consumption and this is key to the Chinese growth story.

WB: What about the potential for a bubble bursting?

YD: China does face significant headwinds: asset price bubbles and inflationary pressures have led to recent worries of a hard landing. We are cautious China in the short term but believe that longer-term it is an interesting investment. Our preferred way of investing in China is via the iShares FTSE/Xinhua China 25. Alternative ways of gaining exposure are indirectly through peripheral Asia; iShares Taiwan, iShares South Korea, iShares Singapore, iShares Malaysia and Market Vectors Indonesia.

WB: How does India look to you?

YD: India presents a different investment opportunity. The stock market is -11.7 per cent YTD, with an estimated PE of 14.8 on the back of inflationary and global growth concerns, as well as heavy foreign investor selling. Foreign investors reportedly account for 20 per cent of equity holdings but 40 per cent of the free float. India tends to suffer when risk appetite declines and investors reduce emerging market exposure.

We like the infrastructure play in India. The government has committed to spending $1 trillion purely on infrastructure in the next five-year plan, which, in our view, opens up a lot of investment opportunities. A much higher proportion of India’s population are young, well-educated and English-speaking than in China, which we believe will be beneficial for the longer-term growth of the Indian economy. Our preferred way of investing in India is via the Lyxor India ETF.

WB: So how can investors gain exposure?

YD: There are a number of ways investors can gain exposure to equity markets in Asia; equities, ETFs, mutual funds, hedge funds, private equity and real estate funds, and direct investments. The ability to get emerging market exposure is partly determined by restrictions placed on foreign investors. In China, for example, foreigners are unable to purchase A shares and are instead restricted to B shares, which are denominated in either HK or US dollars as the renminbi is not a deliverable currency.

WB: Is there anything investors should avoid?

YD: We would strongly advise against purchasing individual equities in emerging markets unless you have local specialist knowledge.  Our preferred route of entry so far has been via ETFs but these are not without risks; some of them are synthetic rather than physically-backed so you end up taking on counterparty risk. Transaction costs can be much higher. Also physically-replicated ETFs can have a much larger tracking error.

When looking at emerging market exposure, investors also need to be sensitive to costs, market capitalisations, bid offer spreads, and liquidity constraints. There are additional geopolitical considerations faced by investors for this region; this has been exemplified by the Middle East protests, riots and reforms that are still ongoing across much of the region.

Lastly, foreign demand can overwhelm smaller emerging market equity markets; this is evident in China as recent weeks have seen heavy foreign selling pushing the Shanghai B share index -19.5 per cent from its April high compared to the A share index which is -12 per cent off of its April high.