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A quarter century ago, Asian markets were referred to as ‘tigers’. But their performance did not live up to the high expectations and the region’s equity markets have changed considerably over 25 years.

Distinct patterns and trends make the Asian equity universe uniquely suitable for active investment management. Timing, tactical adjustments, deep industry analysis and a fundamental approach to investing are key to Asia’s outperformance - much more so than in the US. Strangely though, passive funds have seen most inflows in Asia, not active funds.

Here are 10 characteristics of Asian share markets that made it ‘the home of alpha’.

  1. Diversity is good. In 2000, Taiwan comprised 27 per cent of Asian stockmarket value; now it is half that, with mainland China trebling to exceed 30 per cent. Financial stocks now dominate. And markets are less concentrated around a handful of shares. This has subdued market swings, with average annual volatility falling from 24 per cent between 1995 and 2009 to about 15 per cent over the past decade.
  2. The US has outperformed. Both on an absolute and a risk-adjusted basis, and with lower volatility. Asian companies’ earnings have grown more slowly than US firms’. A dollar invested in the US in 1995 was worth USD11.60 by 2020; in Asian equities it has grown only to USD4.40.
  3. Dancing together. Asian stockmarkets’ correlation with Wall Street is low – though mainland China’s has risen while those of Indonesia, India, Malaysia and The Philippines have fallen from already low levels. India aside, Asian markets now follow China more closely but loose links offer diversification.
  4. Timing and tactics. Asian equity markets have many more months when they rise or fall significantly. Timing is thus important and investors have needed to be active.
  5. Leaders don’t last. Top positions among Asian industries have changed frequently. The pace has slowed, but stock selection remains key.
  6. Stock picking works. Outperformance is typically concentrated in a few large stocks, especially in South Korea, Taiwan, mainland China and Hong Kong - unlike the US market. But across Asia, except in mainland China, the top five companies have been significantly more volatile than the market index, requiring investors to be active.
  7. Reverting to norm. Some markets are quicker than others to return to their average after slumping or jumping. Korea, Malaysia and Singapore were the best ‘mean reversion’ plays; Taiwan the slowest. Picking the right market was thus crucial.
  8. Trust the fundamentals. Investors should study company accounts. Rather than rely on price-earnings ratios, a combination of the growth in earnings and the return on equity plus US bond yields have proved the best forecast of Asian shares’ trajectory.
  9. Oddly, investors are passive. Despite Asia offering greater scope than US markets for outperformance through active management, investors have favoured passive funds over active funds.
  10. But active portfolios outperformed. While passive investment is popular, Asia is uniquely structured for active asset management. Future portfolios may include fewer stocks, focusing on thematic investments, smaller companies, frontier markets and risk-focused investment strategies.

Would you like to find out more? Click here to read the full report (you must be a subscriber to HSBC Global Research).

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