Certain key Asian players, namely China, India and Japan, each have very different stories that Canada’s institutional investors should watch over the long term, according to a portfolio manager at Matthews Asia.
India is experiencing a major boom in domestic-driven growth, says Matthews Asia’s Teresa Kong. Prime Minister Narendra Modi is eager to change the economic landscape by strengthening the country’s physical and financial infrastructure, she says.
The changes he has made are bringing a wave of domestic capital back into official channels, Kong notes. Instead of only holding real assets like land or hoarding cash outside of even a basic bank account, more and more Indians are bringing their money into the financial system, she says. “Getting those savings out of non-productive sources, literally out from under people’s mattresses . . . it’s now actually going into banks. Banks are lending that money and out, and they’re actually increasing the velocity of money within that system.”
The result is a more transparent picture of the country’s economy that will continue to make it a more attractive location for foreign capital, says Kong.
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Further to that transparency, the introduction of a goods and service tax in July, 2017 has made Indian businesses a lot easier to analyze, meaning investors can make allocations to the region with more confidence, says Kong. “The GST allows you to triangulate what a company is really making, instead of just trusting what is on their books,” she says.
As for Japan, the most important story is the recent revitalization of corporate governance, according to Kong. Many government and private institutional investors are now signatories of the Japan stewardship code, a document detailing an enhanced standard of behaviour within the Japanese corporate world. As of the end of 2016, 26 pension plans, both public and private, had signed the code.
In China, key risks persist that cause foreign investors to be leery of entering the market more directly, says Kong. The barriers include different legal and accounting procedures, as well as family motivations that may lie behind the more obvious concerns of a company, she says. “A lot of the time, there’s a family behind the management team, and it’s important to know whether that family is going through a divorce. There might be transitional, legacy issues in terms of how they want to pass on their wealth to their children. That can have a significant impact on the capital structure of these companies,” says Kong.
Read: Is China becoming more open to institutional investors?
Also key in understanding China, Kong emphasizes, is that its exposure within emerging market indexes doesn’t adequately show the scale the country represents in terms of global growth. As a result, an investor can’t attain the real advantages of exposure to China simply by making an allocation to an emerging market index.
Looking ahead, Kong expects investors will be able to understand Chinese equity and fixed-income markets with the increased clarity they have in regards to U.S. markets. The simplicity of dividing equities into small-, mid- and large-cap companies doesn’t exist for foreign investors when looking at China just yet. Kong says that will change, however. ”Right now, there might not be a demand for a small-cap strategy in China, because people are still getting their heads around China. . . . Ten years down the line, we think that people will parse the Chinese market, just like they parse the U.S. market.”