MEDIA RELEASE: There is a long-term opportunity for investors to gain exposure to Asia Pacific equities given low absolute and relative valuations which are being obscured by geopolitical and interest rate concerns. However, this ignores the region’s solid macroeconomic advantages, according to Robeco’s head of Asia Pacific equities, Joshua Crabb.

Despite headline concerns with some emerging market currencies and banking sector events in the US and Europe continuing to impact sentiment, Mr Crabb said financial risks are lower in Asia given more conservative monetary and fiscal policies over the last few years, and the ongoing reopening backdrop.

“The last time Asia was this cheap, fiscal and monetary policy was a lot weaker than now, yet subsequent market outperformance was dramatic.

“South-east Asian countries in particular are in the sweet spot: supply chain diversification benefits these countries as suppliers of materials, receivers of capex and the home to the next wave consumers. India feels expensive but is becoming more attractive for its structural growth opportunities. Markets such as Korea and Taiwan carry strong prospects of a semiconductor recovery against low valuations. Japan is benefitting from mild inflation and more shareholder friendly policies.

“The long-term structural foundations of the Asia Pacific region will assert themselves over time, making it an opportune time to invest in Asia Pacific ahead of the next era of growth,” he said.

Mr Crabb said despite the promising outlook, the first half of 2023 has been a false start in the asset class, with optimism over China’s re-opening fading and the Federal Reserve’s hawkish stance surviving the ongoing sequence of mid-size US bank failures, supporting the US dollar.

“This has left Asia Pacific markets treading water somewhat and especially as concerns over the outlook for high value exports like semiconductors to the slowing US economy have increased. This absence of short-term catalysts is keeping investors on the sidelines but this creates the opportunity for longer term orientated investors,” he said.

In these periods of risk-off, the US dollar tends to firm and is a headwind for Asia Pacific equities, however this should be viewed by investors as a window to increase allocation to the region.

“Asia Pacific is strategic to the world’s two dominant economies – the US and China - and exposure now will capture upside as the valuation gap narrows. The valuation gap remains enormous, despite the slow-burning banking crisis in the US, and the S&P 500 has outperformed relative to Asia Pacific markets.

“In previous cycles, post the dotcom bubble and after the GFC, this kind of gap has heralded a strong and long period of outperformance for Asia Pacific.

“In addition, Asia Pacific economies are not suffering from high inflation in the same way as Europe, the US or some emerging economies. This is giving governments in the region policy flexibility, and supports the view that macro fundamentals will start to be reflected in relative equity valuations,” he said.