– After a strong credit cycle across the region, we face the hangover. Countries most dependent on Chinese growth look most vulnerable

– Valuations in Asia are high. There have been few economic/structural reforms to improve the business environment and corporate governance is generally poor in emerging Asia

– Preferred areas for investment are globally competitive industrials, select technology names, ASEAN and Indian retail banks, healthcare, and Hong Kong and Singapore property. Asian consumer and internet stocks are generally overbought and overvalued.

At the beginning of 2014 brokers in unison were recommending clients to buy North Asian markets (China and Korea) over Southeast Asian markets. We learnt long ago not to follow such market advice, and felt that given the generally superior quality of companies in Southeast Asia, these recommendations should be completely ignored. Sure enough Thailand, Indonesia, the Philippines and India have significantly outperformed Korea and China in 2014.

The point is that making money on Asian stockmarkets requires skilled investing in quality companies providing consistent shareholder returns, including dividends, trading at sensible valuations.

This means ignoring as much as possible a lot of noise around politics and macro-economic data, which can often be used to encourage poor investment decisions. Given the slowing global growth picture, a strong credit cycle in China and across the region, and high valuations for decent companies, we are sanguine about the outlook for Asian markets in 2015. Longer term, we believe the region continues to hold many significant advantages. Let us start by considering a structural factor that does worry us, as opposed to GDP statistics.

Technological change in Asia

In a fast-changing world where technology and the ‘digitisation’ of economies are becoming more commonplace, businesses around the world will have to adapt. Asia is no exception. The vertiginous drop in the cost of processing power, combined with the rise of ‘intelligent machines’, means many current jobs may become redundant.

For a region that has traditionally been seen as both a source of cheap labour for manufacturing and having a young and rising middle class, the implications will be wide-reaching. Machines are increasingly replacing workers as industrial robots continue to simultaneously tumble in price and advance in intelligence. Decisions on where to locate manufacturing hubs are now based on proximity to the end market and where legal, tax, red tape and finance costs are most favourable. Asia (bar Hong Kong and Singapore) does not do well when it comes to ease of doing business. The days of Asia as the cheap workshop of the world are not sustainable.

For professional investors and advisers only

SchrodersOutlook 2015: Asian ex Japan Equities

“ In a fast-changing world where technology and the ‘digitisation’ of economies are becoming more commonplace, businesses the world over will have to adapt. Asia is no exception”

Robin Parbrook, Head of Asian ex Japan Equities

As a result of this, growth rates in Asia will likely disappoint over the coming years. Sluggish investment and cautious consumers will mean that growth rates will be slower than historic levels. What does this mean for investors? We are cautious about overpaying for Asian consumer names, with many still trading on extremely high premiums. In addition to this, we are also wary of traditional labour-intensive manufacturing businesses and commodity-intensive industries.

Where are the current opportunities in Asia? There are markets in Asia where the interests of minority shareholders are upheld and this is why we continue to favour listed companies in the likes of Australia, Hong Kong and Singapore and parts of Southeast Asia. These markets offer established franchises with professional management, strong balance sheets and cash flows, along with broader regional exposure. Our preferred areas for investment are globally competitive Asian industrial companies, select technology names, ASEAN and Indian retail banks, healthcare and some cheap Hong Kong and Singapore property companies. Asian consumer and internet stocks are generally overbought and overvalued.

With disruptive technologies impacting businesses everywhere, this means that, as always, it is imperative to invest in companies based on their individual merits and current share price, amidst an increasingly uncertain world. On this basis, we believe Asia continues to provide many strong investment opportunities.

Outlook 2015: Asian ex Japan Equities

Robin Parbrook, Head of Asian ex Japan Equities

Robin Parbrook has 23 years’ experience covering Asia, all of it with Schroders. Robin is currently the Head of Asia ex Japan Equities and also a regional and alternatives fund manager, based in Hong Kong. In 2008 he moved to Edinburgh to focus on managing Asian investment strategies with a focus on absolute returns, and returned to Hong Kong in August 2010 to continue to manage Asian Total Return as well as other Asian equity strategies. In his career he has successfully managed a range of Asian funds.

The views and opinions contained herein are those of Robin Parbrook and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested. Issued in November 2014 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. w46260

“ Our preferred areas for investment are globally competitive Asian industrial companies, select technology names, ASEAN and Indian retail banks, healthcare and some cheap Hong Kong and Singapore property companies.”