Forum Finance Group
Asian equities play an important diversification role within our emerging market exposure, because the region has historically been a strong performance contributor, despite occasional periods of high volatility.
As with all portfolio components, emerging market exposure – and particularly Asia – is more of a risk management task than a simple capital allocation.
We use actively managed funds for our strategic emerging market allocation, whereas ETFs are reserved for tactical opportunities. The funds we select have to demonstrate a proven track record of picking companies with strong balance sheets and good corporate governance. Our Asia-centric investments are especially tilted towards a manager with a ‘forensic accounting’ capacity to mitigate additional risks.
Since the beginning of the year, we have steadily increased our pan-Asian exposure on the back of attractive valuations. Emerging markets in general have been under pressure this year, not just the Asian region. Some of the volatility is related to idiosyncratic matters, such as politics and fears of escalating sanctions, while other concerns are applicable for all markets, including developed ones: tightening of financial conditions and resulting US dollar strength, increasing trade tensions, and rising energy prices.
Most of these matters are nothing new for emerging markets and tend to have a greater impact on economies that failed to take precautionary measures during the good times – by diversifying their energy consumption or securing other energy sources, for example, or reducing and diversifying non-local currency debt issuance.
However, emerging markets are now in a much better position than during some of the past reference periods used by investors. In most cases, their currencies seem to be undervalued.